<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25034
GREATER BAY BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 77-0387041
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
2860 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 813-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on March 10, 1997, as reported
on the Nasdaq National Market System, was approximately $77,051,485. Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. Such determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 10, 1997, 3,297,692 shares of the Registrant's Common Stock were
outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Discussions of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), and as such, may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which Greater
Bay Bancorp (referred to as the "Company" when such reference includes Greater
Bay Bancorp and its subsidiaries, collectively, or "Greater Bay" when
referring only to the parent company) operates, projections of future
performance, perceived opportunities in the market and statements regarding
the Company's mission and vision. The Company's actual results, performance
and achievements may differ materially from the results, performance and
achievements expressed or implied in such forward-looking statements. For a
discussion of some of the factors that might cause such a difference, see
"Item 1. Business--Summary of Business Considerations and Certain Factors That
May Affect Future Results of Operations and/or Stock Price."
ITEM 1. BUSINESS.
GREATER BAY
Greater Bay is a bank holding company operating Cupertino National Bank
("CNB") and Mid-Peninsula Bank ("MPB") with seven regional offices in
Cupertino, Palo Alto, San Mateo, San Carlos and San Jose, California. At
December 31, 1996, the Company had total assets of $622.0 million, total net
loans of $441.6 million and total deposits of $559.3 million.
HISTORY
Greater Bay is the result of the merger (the "Merger"), effective November
27, 1996, of Cupertino National Bancorp ("Cupertino") and Mid-Peninsula
Bancorp ("Mid-Peninsula"). Cupertino was formed in 1984 as the holding company
for CNB, a national banking association which began operating in 1985. Mid-
Peninsula was formed in 1984 under the name San Mateo County Bancorp ("San
Mateo") as the bank holding company of San Mateo County National Bank, which
subsequently changed its name to WestCal National Bank ("WestCal") in 1991. In
1994, WestCal was merged into Mid-Peninsula Bank, a California state chartered
bank organized in 1987, and San Mateo concurrently changed its name to Mid-
Peninsula Bancorp.
Cupertino and Mid-Peninsula undertook the Merger with the intention of
achieving five primary goals. These goals included (i) developing a greater
banking presence throughout Santa Clara and San Mateo Counties by increasing
the number of banking offices to seven; (ii) reaching a critical mass in the
Company's market areas in order to better meet competitive challenges inherent
in the banking and financial services industries; (iii) enabling the resulting
Company to maximize the utilization of capital by increasing the float and
marketability of its common stock and, by virtue of its larger size, obtaining
access to a lower cost of capital; (iv) providing an opportunity to realize
operating efficiencies made available by the combination of Cupertino and Mid-
Peninsula; and (v) enabling CNB and MPB to cross-sell services.
SUPER COMMUNITY BANKING PHILOSOPHY
In order to meet the demands of the increasingly competitive banking and
financial services industries, management has adopted a business philosophy
referred to as the "Super Community Banking Philosophy." The Super Community
Banking Philosophy is based on management's belief that banking customers
value doing business with locally managed institutions that can provide a full
service commercial banking relationship through an understanding of the
customer's financial needs and the flexibility to customize products and
services to meet those needs. Management further believes that banks are
better able to build successful customer relationships by affiliating with a
holding company that provides cost effective administrative support services
while promoting bank autonomy and flexibility.
To implement this philosophy, Greater Bay operates CNB and MPB as separate
subsidiaries by retaining their independent names along with their individual
Boards of Directors. Both MPB and CNB have established strong reputations and
customer followings in their respective market areas through attention to
client service
1
<PAGE>
and an understanding of client needs. In an effort to capitalize on the
identities and reputations of the Banks, the Company will continue to market
its services under the CNB and MPB names, primarily through each Bank's
relationship managers. The primary focus for the Banks' relationship managers
is to cultivate and nurture their client relationships. Relationship managers
are assigned to each borrowing client to provide continuity in the
relationship. This emphasis on personalized relationships requires that all of
the relationship managers maintain close ties to the communities in which they
serve, so they are able to capitalize on their efforts through expanded
business opportunities for the Banks.
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing improved access to the capital markets and
expanded client support services, such as business cash management,
international trade services and accounting services. In addition, Greater Bay
provides centralized administrative functions, including support in credit
policy formulation and review, investment management, data processing,
accounting and other specialized support functions thereby allowing the Banks
to focus on client service.
CORPORATE GROWTH STRATEGY
The Company's business strategy is to focus on increasing its market share
within the communities it serves through continued internal growth. As a
result of the Merger, the Company has the opportunity to market the
specialized products and services of the venture lending division ("Venture
Lending Group"), the trust division ("Greater Bay Trust Company") and the
Small Business Administration ("SBA") Department to a larger customer base.
The Company believes that these products and services, available prior to the
Merger only to customers of CNB, will be attractive to customers and contacts
of MPB in the venture capital community and the high net worth customers of
MPB. The Company believes that the infrastructure developed by Cupertino to
support the Greater Bay Trust Company, the SBA Department and the Venture
Lending Group will allow the Company to offer the products and services of
these groups without significant additional overhead costs.
The Company also will pursue opportunities to expand its market share
through select acquisitions that management believes complement the Company's
businesses. While management would prefer to make acquisitions which would
expand its presence in its current market areas of Santa Clara and San Mateo
Counties, it will also pursue opportunities to expand its market through
acquisitions in other parts of the South, East, and North Bay Areas of San
Francisco.
THE BANKS
CNB
CNB presently has four banking offices. CNB's main office is in Cupertino,
and it has one regional office in San Jose and two regional offices in Palo
Alto. At December 31, 1996, CNB had total assets of $339.7 million, total net
loans of $248.4 million and total deposits of $302.3 million.
MPB
MPB presently has three banking offices. MPB's main office is in Palo Alto.
MPB also has regional offices in San Mateo and in San Carlos. On December 31,
1996, MPB had total assets of $282.3 million, total net loans of
$193.1 million and total deposits of $257.5 million.
BANKING SERVICES
Through their networks of regional offices, the Banks provide a wide range
of commercial banking services to small and medium-sized businesses, real
estate developers and property managers, business executives, professionals
and other individuals. In addition, the Greater Bay Trust Company provides
trust services to support the trust needs of the Banks' clients.
2
<PAGE>
The Banks offer a wide range of deposit products. These include the normal
range of personal and business checking and savings accounts, time deposits
and individual retirement accounts. The Banks also offer a wide range of
specialized services designed to attract and service the needs of customers
and include cash management and international trade services for business
clients, traveler's checks, safe deposit and MasterCard and Visa merchant
deposits services.
The Banks also engage in the full complement of lending activities,
including commercial, real estate and consumer loans. The Banks provide
commercial loans for working capital and business expansion to small and
medium-sized businesses with annual revenues generally in the range of $1.0
million to $50.0 million. The Banks' commercial customers are drawn from a
wide variety of manufacturing, wholesale and service businesses. The Banks
provide interim real estate loans primarily for construction in the Banks'
primary service areas of single-family residences, which typically range
between approximately $500,000 and $1.0 million, and multi-unit projects,
which typically range between approximately $1.5 million and $4.0 million. The
Banks provide medium term commercial real estate loans or credits for the
financing of commercial or industrial buildings where the properties are
either used by the owner for business purposes or have income derived from
tenants, which typically range between approximately $750,000 and $3.0
million. Loans to professionals and other individual clients cover a full
range of consumer services, such as automobile, aircraft, home improvement and
home equity loans, and other secured and unsecured lines of credit, including
credit cards.
Through the SBA Department, loans are made to smaller businesses and are
generally 65% to 80% guaranteed by the SBA. In 1994, CNB was named a Preferred
Lender by the SBA. Preferred Lender status is awarded by the SBA to lenders
who have demonstrated superior ability to generate, underwrite and service
loans guaranteed by the SBA, and results in more rapid turnaround of loan
applications submitted to the SBA for approval.
In May 1994, the Company organized the Venture Lending Group to serve the
needs of companies in their start-up and development phase. This unit was
developed to meet the needs of such clients in the Company's service area by
allowing them to access a banking relationship early in their development. The
loans to this target group of clients are generally secured by the accounts
receivable, inventory and equipment of the companies. The financial strength
of these companies also tends to be bolstered by the presence of venture
capital investors among their shareholders.
MARKET AREA
The Banks concentrate on marketing their services to small and medium-sized
businesses, professionals and individuals in the Santa Clara and San Mateo
Counties. Santa Clara County, CNB's primary base of operations, encompasses
the geographic area between San Jose to the south and Palo Alto to the north.
Santa Clara County ranks third in California median household income. CNB is
headquartered in Cupertino, California, which is in the center of the
geographical area referred to as the "Silicon Valley." The city of Cupertino
has a population of approximately 44,000, and its median annual household
income exceeds $76,000. MPB's primary market area ranges from Palo Alto to the
south to South San Francisco to the north. MPB is headquartered in Palo Alto,
California. The city of Palo Alto has a population of approximately 60,000,
and its median annual household income exceeds $72,000.
The commercial base of Santa Clara and San Mateo Counties is diverse and
includes computer and semiconductor manufacturing, professional services,
printing and publishing, aerospace, defense and real estate construction, as
well as wholesale and retail trade. As a result of its geographic
concentration, the Company's results depend largely upon economic conditions
in these areas. While the economy in the Company's market areas have exhibited
positive economic and employment trends, there is no assurance that such
trends will continue. A deterioration in economic conditions could have
material adverse impact on the quality of the Company's loan portfolio and the
demand for its product and services, and accordingly its results of
operations. See "Item 1. Business--Summary of Business Considerations and
Certain Factors That May Affect Future Results of Operations and/or Stock
Price--Economic Conditions and Geographic Concentration."
3
<PAGE>
LENDING ACTIVITIES
UNDERWRITING AND CREDIT ADMINISTRATION
The lending activities of each of the Banks is guided by the basic lending
policies established by its Board of Directors. The Company is currently
preparing a new loan policy to govern the lending activities of both Banks.
The new policy is expected to be fully implemented during the second quarter
of 1997. Once implemented, the credit policy will be approved each year by the
Boards of Directors of Greater Bay and each of the Banks and will be managed
through periodic reviews.
Each loan must meet minimum underwriting criteria established in the Bank's
lending policy. Lending authority is granted to officers of each Bank on a
limited basis. Loan requests exceeding individual officer approval limits are
approved by the Officers Loan Committees of the respective Banks. Loan
requests exceeding these limits are submitted to the Greater Bay Officers Loan
Committee, which consists of the President and Chief Executive Officer of
Greater Bay, the Executive Vice President and Chief Lending Officer of Greater
Bay, the Executive Vice President and Chief Credit Officer of MPB and the
Senior Vice President and Chief Credit Officer of Greater Bay. Loans requests
which exceed the limits of the Greater Bay Officers Loan Committee are
submitted to the Directors Loan Committee for final approval. The Directors
Loan Committee consists of four outside directors. Each of these committees
meet on a regular basis in order to provide timely responses to the Banks'
clients.
The Company's credit administration function includes an internal review and
the regular use of an outside loan review firm. In addition, the Greater Bay
Officers Loan Committee and Chief Financial Officer meet at a minimum of at
least once a month and review delinquencies, non-performing assets, classified
assets and other pertinent information to evaluate credit risk within each
Bank's loan portfolio and to recommend general reserve percentages and
specific reserve allocations. The information reviewed by this committee is
submitted to the Boards of Directors of the Company on a monthly basis.
LOAN PORTFOLIO
Approximately 57.0% of the Company's gross loan portfolio was in commercial
loans at December 31, 1996, and real estate construction and land loans
represented approximately 17.4% of total loans, primarily for residential
projects. In addition, 16.1% of the Company's loans were real estate term
loans, which are primarily secured by commercial properties. The balance of
the portfolio consists of consumer loans.
The interest rates charged for the loans made by the Banks vary with the
degree of risk, size and maturity of the loans. Rates are generally affected
by competition, associated factors stemming from the client's deposit
relationship with the Bank and the Banks' cost of funds.
Commercial Loans. In their commercial loan portfolio, the Banks provide
personalized financial services to the diverse commercial and professional
businesses in their market areas. Commercial loans, including those made by
the Venture Lending Group, consist primarily of short-term loans (normally
with a maturity of under one year) for working capital and business expansion.
Commercial loans typically include revolving lines of credit collateralized by
inventory, accounts receivable and equipment. Emphasis is placed on the
borrower's earnings history, capitalization, secondary sources of repayment,
and in some instances, third party guarantees or highly liquid collateral
(such as time deposits and investment securities). Commercial loan pricing is
generally at a rate tied to the prime rate (as quoted in the Wall Street
Journal) or the Banks' reference rates.
The Venture Lending Group serves the needs of companies in their start-up
and development phase. Typical clients include technology companies, ranging
from multimedia, software and telecommunications providers to bio-technology
and medical device firms. The Venture Lending Group provides innovative
lending products and other financial services, tailored to the needs of start-
up and growth-stage companies. Borrowings are generally secured by minimum
cash balances, accounts receivable, intellectual property rights, inventory
and equipment of the companies. Many of these companies are in the start-up or
development phase and will not generate any
4
<PAGE>
revenues for several years. The Company will often receive warrants from these
companies as part of the compensation for its services.
The Company participates in many SBA programs and, through CNB, is a
"preferred lender." Preferred lender status is granted to a lender which has
made a certain number of SBA loans and which, in the opinion of the SBA has
staff who are qualified and experienced in this area. As a preferred lender,
the Company has the authority to authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial
savings in serving a customer's needs. The Company utilizes both the 504
program, which is focused toward longer-term financing of buildings, and other
long-term assets, and the 7A program which is primarily used for financing of
the equipment, inventory and working capital needs of eligible businesses
generally over a three- to seven-year term. The Company's collateral position
in the SBA loans is enhanced by the SBA guaranty in the case of 7A loans, and
by lower loan-to-value ratios under the 504 program. The Company generally
sells the guaranteed portion of its SBA loans in the secondary market.
Real Estate Construction and Land Loans. The Banks' real estate construction
loan activity has focused on providing short-term (less than one year
maturity) loans to individuals and developers with whom the Banks have
established relationships for the construction primarily of single family
residences in the Banks' market areas. During 1992 and 1993, the Banks
concentrated their construction loan activity on owner-occupied custom
residences. During 1994, as real estate values began to stabilize, the Banks
also entered the construction loan market for multi-unit single family
residential projects. During 1995 and 1996, the Banks continued to expand
their real estate construction portfolio with the help of the improving real
estate market in Northern California.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability
of the project and the borrower's credit-worthiness are primary considerations
in the loan underwriting decision. Generally, these loans provide an
attractive yield, but may carry a higher than normal risk of loss or
delinquency, particularly if general real estate values decline. The Banks
utilize approved independent local appraisers and loan-to-value ratios which
generally do not exceed 65% to 75% of the appraised value of the property. The
Banks monitor projects during the construction phase through regular
construction inspections and a disbursement program tied to the percentage of
completion of each project.
The Banks also occasionally make land loans to person who intend to
construct a single family residence on the lot generally within twelve months.
In addition, the Banks have occasionally in the past, and may to a greater
extent in the future, make commercial real estate construction loans to high
net worth clients with adequate liquidity for construction of office and
warehouse properties. Such loans are typically secured by first deeds of trust
and require guarantees of the borrower.
Commercial Real Estate Term Loans. The Banks provide medium-term commercial
real estate loans secured by commercial or industrial buildings where the
properties are either used by the owner for business purposes or have income
derived from tenants. The Company's loan policies require the principal
balance of the loan, generally between $750,000 and $3.0 million, to be no
more than 70% of the stabilized appraised value of the underlying real estate
collateral. The loans, which are typically secured by first deeds of trust
only, generally have terms of no more than seven to ten years and are
amortized over 20 years. Most of these loans have rates tied to the prime
rate, with many adjusting whenever the prime rate changes; the remaining loans
adjust every two or three years depending on the term of the loan.
Consumer and Other Loans. The Banks' consumer and other loan portfolio is
divided between installment loans secured by automobiles and aircraft, and
home improvement loans and equity lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one-to-five year maturity), while the equity lines of credit and home
improvement loans are generally floating rate and are reviewed for renewal on
an annual basis. The Banks also have a minimal portfolio of credit card loans,
issued as an additional service to its clients.
5
<PAGE>
DEPOSITS
The Banks' deposits are obtained primarily from small and medium-sized
businesses, business executives, professionals and other individuals. Each of
the Banks offers the usual and customary range of depository products provided
by commercial banks. The Banks' deposits are not received from a single
depositor or group of affiliated depositors, the loss of any one of which
would have a material adverse effect on the business of the Company or either
of the Banks. Rates paid on deposits vary among the categories of deposits due
to different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
CNB has two business units that provide significant support to its deposit
base. The Greater Bay Trust Company has approximately 10% of its trust assets
under management in liquid funds that are retained in CNB money market demand
accounts. At December 31, 1996, these funds totaled approximately $41.7
million. The Venture Lending Group, which finances companies in their start-up
and development stage, is another source of deposits as most of the start-up
phase companies have significant liquidity that is deposited in the bank as
part of the banking relationship. At December 31, 1996, customers of the
Venture Lending Group had approximately $38.1 million in deposits at CNB.
TRUST DEPARTMENT
The Greater Bay Trust Company commenced operations in July 1988. The Greater
Bay Trust Company offers a full range of fee-based trust services directly to
its clients and administers several types of retirement plans, including
corporate pension plans, 401(k) plans and individual retirement plans, with an
emphasis on the investment management, custodianship and trusteeship of such
plans. In addition, the Greater Bay Trust Company acts as executor,
administrator, guardian and/or trustee in the administration of the estates of
individuals. Investment and custodial services are provided for corporations,
individuals and nonprofit organizations. Total assets under management by the
Greater Bay Trust Company were approximately $418.0 million at December 31,
1996, compared to $270.0 million at December 31, 1995 and $157.0 million at
December 31, 1994.
COMPETITION
The banking and financial services business in California generally, and in
the Banks' market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. The Banks compete for
loans, deposits and customers for financial services with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market
funds, credit unions, and other nonbank financial service providers. Many of
these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than the Banks. In order to compete with the other financial services
providers, the Banks principally rely upon local promotional activities,
personal relationships established by officers, directors and employees with
its customers, and specialized services tailored to meet its customers' needs.
In those instances where the Banks are unable to accommodate a customer's
needs, the Banks may arrange for those services to be provided by its
correspondents. The Banks have seven offices located in the Santa Clara and
San Mateo Counties. Neither the deposits nor loans of the offices of the
respective Banks exceed 1% of all financial services companies located in such
counties.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Banks on their deposits and
their other borrowings and the interest rate received by the Banks on loans
extended to their customers and securities held in the Banks' portfolios
comprises the major portion of the Banks' earnings. These rates are highly
sensitive to many factors that are beyond the control of the Banks.
Accordingly, the earnings and growth of the Banks are subject to the influence
of domestic and foreign economic conditions, including inflation, recession
and unemployment.
6
<PAGE>
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly
the Federal Reserve. The Federal Reserve implements national monetary policies
(with objectives such as curbing inflation and combating recession) by its
open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its
reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve in
these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial services
providers. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
services provider are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional
agencies. The likelihood of any major legislative changes and the impact such
changes might have on Greater Bay or the Banks are impossible to predict.
EMPLOYEES
At December 31, 1996, the Company had 177 full-time employees. None of the
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be satisfactory.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws which relate to the regulation of Greater Bay and the Banks. The
description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
GREATER BAY
Greater Bay, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Greater
Bay is required to file with the Federal Reserve quarterly and annual reports
and such additional information as the Federal Reserve may require pursuant to
the BHCA. The Federal Reserve may conduct examinations of Greater Bay and its
subsidiaries.
The Federal Reserve may require that Greater Bay terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, Greater Bay must file
written notice and obtain approval from the Federal Reserve prior to
purchasing or redeeming its equity securities. Further, Greater Bay is
required by the Federal Reserve to maintain certain levels of capital. See "--
Capital Standards" herein.
Greater Bay is required to obtain the prior approval of the Federal Reserve
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of Greater Bay and another bank holding company.
Greater Bay is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of
7
<PAGE>
banking, managing or controlling banks or furnishing services to its
subsidiaries. However, Greater Bay, subject to the prior approval of the
Federal Reserve, may engage in any, or acquire shares of companies engaged in,
activities that are deemed by the Federal Reserve to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
In making any such determination, the Federal Reserve is required to consider
whether the performance of such activities by Greater Bay or an affiliate can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve is also empowered to differentiate between activities
commenced de novo and activities commenced by acquisition, in whole or in
part, of a going concern. In 1996, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Budget Act") eliminated the requirement
that bank holding companies seek Federal Reserve approval before engaging de
novo in permissible nonbanking activities listed in Regulation Y, which
governs bank holding companies, if the holding company and its lead depository
institution are well-managed and well-capitalized and certain other criteria
specified in the statute are met. For purposes of determining the capital
levels at which a bank holding company shall be considered "well-capitalized"
under this section of the Budget Act and Regulation Y, the Federal Reserve
adopted, as a rule, risk-based capital ratios (on a consolidated basis) that
are the same as the levels set for determining that a state member bank is
well capitalized under the provisions established under the prompt corrective
action provisions of federal law. See "--Prompt Corrective Action and Other
Enforcement Mechanisms" herein.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve's policy that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and
unsound banking practice or a violation of the Federal Reserve's regulations
or both.
Greater Bay is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, Greater Bay and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
Finally, Greater Bay is subject to the periodic reporting requirements of
the Exchange Act, including, but not limited to, filing annual, quarterly and
other current reports with the Commission.
THE BANKS
CNB, as a national banking association, is subject to primary supervision,
examination and regulation by the Comptroller. MPB, as a California state
chartered bank and member of the Federal Reserve System, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the Federal Reserve. If, as a
result of an examination of a bank, the bank regulatory agencies should
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is violating
or has violated any law or regulation, various remedies are available to the
bank regulatory agencies. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate a bank's deposit insurance, which
would result in a revocation of the bank's charter. Neither CNB nor MPB has
been the subject of any such actions by their respective regulatory agencies.
8
<PAGE>
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation ("FDIC") in the manner and to the extent provided by law. For this
protection, the Banks pay a semiannual statutory assessment. See "--Premiums
for Deposit Insurance" herein.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Banks. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
RESTRICTIONS ON TRANSFERS OF FUNDS TO GREATER BAY BY THE BANKS
Greater Bay is a legal entity separate and distinct from the Banks. Greater
Bay's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to Greater Bay by the Banks. California law restricts the
amount available for cash dividends by state chartered banks, such as MPB, to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions made to shareholders by the bank or by
any majority-owned subsidiary of the bank during such period). Notwithstanding
this restriction, a bank may, with the prior approval of the Superintendent,
make a distribution to its shareholders in an amount not exceeding the greater
of the retained earnings of the bank, net income for such bank's last fiscal
year or the net income of the bank for its current year. The prior approval of
the Comptroller is required if the total of all dividends declared by a
national bank, such as CNB, in any calendar year exceeds the bank's net
profits (as defined) for that year combined with its retained net profits (as
defined) for the preceding two years, less any required transfers to surplus
or a fund for the retirement of any preferred stock.
The bank regulatory agencies also have authority to prohibit banks from
engaging in activities that, in their respective opinions, constitute unsafe
or unsound practices in conducting its business. It is possible, depending
upon the financial condition of the bank in question and other factors, that
the bank regulatory agencies could assert that the payment of dividends or
other payments might, under some circumstances, be such an unsafe or unsound
practice. Further, the bank regulatory agencies have established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines and the restrictions that are or may be imposed
under the prompt corrective action provisions of federal law could limit the
amount of dividends which the Banks or Greater Bay may pay. See "--Prompt
Corrective Action and Other Enforcement Mechanisms" herein and "--Capital
Standards" herein for a discussion of these additional restrictions on capital
distributions.
Substantially all of Greater Bay's revenues, including funds available for
the payment of dividends and other operating expenses, are, and will continue
to be, dividends paid by the Banks. At December 31, 1996, the Banks had $6.3
million in the aggregate available for the payment of cash dividends.
The Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Greater Bay or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of Greater Bay or other affiliates. Such
restrictions prevent Greater Bay and such other affiliates from borrowing from
the Banks unless the loans are secured by marketable obligations or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in Greater Bay or to or in any other affiliate
is limited to 10% of the respective bank's capital stock and surplus (as
defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the respective banks' capital stock and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving Greater Bay and
other controlling persons of the Banks. Additional restrictions on
transactions with affiliates may be imposed on the Banks under the prompt
corrective action provisions of federal law. See "--Prompt Corrective Action
and Other Enforcement Mechanisms" herein.
9
<PAGE>
COMMON LIABILITY
Under federal law, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with the default of a commonly controlled FDIC-insured
depository institution or any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default. These provisions can
have the effect of making one subsidiary bank of Greater Bay responsible for
FDIC-insured losses at another subsidiary bank.
CAPITAL STANDARDS
The Federal Reserve, the Comptroller and the FDIC have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which includes off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of, among other
things, (i) common shareholders' equity capital (includes common stock and
related surplus, and undivided profits); (ii) noncumulative perpetual
preferred stock (cumulative perpetual preferred stock for bank holding
companies), including any related surplus; and (iii) minority interests in
certain subsidiaries, less most intangible assets. Tier 2 capital may consist
of: (i) a limited amount of the allowance for loan and lease losses ("ALLL");
(ii) cumulative perpetual preferred stock; (iii) perpetual preferred stock
(and any related surplus); (iv) term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio
of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets
must be 3%. For all banking organizations not rated in the highest category,
the minimum leverage ratio must be at least 100 to 200 basis points above the
3% minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the ALLL which, among other things, establishes certain benchmark
ratios of loan loss reserves to classified assets. The benchmark
10
<PAGE>
set forth by such policy statement is the sum of (a) assets classified loss;
(b) 50 percent of assets classified doubtful; (c) 15 percent of assets
classified substandard; and (d) estimated credit losses on other assets over
the upcoming 12 months. This amount is neither a "floor" nor a "safe harbor"
level for an institution's ALLL.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules governing banks and bank holding
companies, which became effective April 1, 1995 and limit the amount of
deferred tax assets that are allowable in computing an institution's
regulatory capital. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, based on projected taxable income for that
year or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess
of this limit would be excluded from Tier 1 Capital and total assets and
regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends. For information
concerning the capital ratios of Greater Bay and the Banks, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Capital Resources."
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those that fall below one or more prescribed minimum
capital ratios. In accordance with federal law, each federal banking agency
has promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An insured
depository institution will be classified in the following categories based,
in part, on the capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
Total risk-based capital of at
least 10%; Total risk-based capital of at least 8%;
Tier 1 risk-based capital of 6%;
and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than
8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less
than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets
less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
11
<PAGE>
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject
to asset growth restrictions and required to obtain prior regulatory approval
for acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
receiving notice, or is deemed to have notice, that the institution is
undercapitalized. The appropriate federal banking agency cannot accept a
capital plan unless, among other things, it determines that the plan: (i)
specifies: (a) the steps the institution will take to become adequately
capitalized; (b) the levels of capital to be attained during each year in
which the plan will be in effect; (c) how the institution will comply with the
applicable restrictions or requirements then in effect of the Federal Deposit
Insurance Act; and (d) the types and levels of activities in which the
institution will engage; (ii) is based on realistic assumptions and is likely
to succeed in restoring the depository institution's capital; and (iii) would
not appreciably increase the risk (including credit risk, interest-rate risk,
and other types of risk) to which the institution is exposed. In addition,
each company controlling an undercapitalized depository institution must
guarantee that the institution will comply with the capital plan until the
depository institution has been adequately capitalized on average during each
of four consecutive calendar quarters and must otherwise provide appropriate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of
a receiver or conservator, a forced merger; (ii) restrictions on transactions
with affiliates; (iii) further limitations on interest rates paid on deposits;
(iv) further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by
the holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by
the appropriate federal banking agency. Although the appropriate federal
banking agency has discretion to determine which of the foregoing restrictions
or sanctions it will seek to impose, it is required to: (i) force a sale of
shares or obligations of the bank, or require the bank to be acquired by or
combine with another institution; (ii) impose restrictions on affiliate
transactions and (iii) impose restrictions on rates paid on deposits, unless
it determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in
which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
12
<PAGE>
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. See "--Potential Enforcement Actions" herein.
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by Federal
Deposit Insurance Corporation Improvement Act. These standards are designed to
identify potential safety and soundness concerns and ensure that action is
taken to address those concerns before they pose a risk to the deposit
insurance funds. The standards relate to (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fee and
benefits. If a federal banking agency determines that an institution fails to
meet any of these standards, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard. In
the event the institution fails to submit an acceptable plan within the time
allowed by the agency or fails in any material respect to implement an
accepted plan, the agency must, by order, require the institution to correct
the deficiency. Effective October 1, 1996, the federal banking agencies
promulgated safety and soundness regulations and accompanying interagency
compliance guidelines on asset quality and earnings standards. These new
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. The
institution should: (i) conduct periodic asset quality reviews to identify
problem assets; (ii) estimate the inherent losses in those assets and
establish reserves that are sufficient to absorb estimated losses; (iii)
compare problem asset totals to capital; (iv) take appropriate corrective
action to resolve problem assets; (v) consider the size and potential risks of
material asset concentrations; and (vi) provide periodic asset reports with
adequate information for management and the board of directors to assess the
level of asset risk. These new guidelines also set forth standards for
evaluating and monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law, which establishes an assessment rate schedule
ranging from 0 cents per $100 of deposits to 27 cents per $100 of deposits
applicable to members of BIF. To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios using
the same standards used by the FDIC for its prompt corrective action
regulations. A well-capitalized institution is generally one that has at least
a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and
a 5% Tier 1 leverage capital ratio. An adequately capitalized institution will
generally have at least an 8% total risk-based capital ratio, a 4% Tier 1
risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An
undercapitalized institution will generally be one that does not meet either
of the above definitions. The FDIC will also assign each institution to one of
three subgroups based upon reviews by the institution's primary federal or
state regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution. The
three supervisory categories are: financially sound with only a few minor
weaknesses (Group A), demonstrates weaknesses that could result in significant
deterioration (Group B), and poses a substantial probability of loss (Group
C).
13
<PAGE>
The BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996*
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized.................................. 0 3 17
Adequately Capitalized............................ 3 10 24
Undercapitalized.................................. 10 24 27
</TABLE>
- --------
*Assessment figures are expressed in terms of cents per $100 per deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund ("SAIF") through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis
of the late 1980's. The special thrift SAIF assessment has been set at 65.7
cents per $100 of deposits insured by SAIF as of March 31, 1995. Effective
January 1, 1997, for the FICO payments, SAIF-insured institutions will pay 3.2
cents per $100 in domestic deposits and BIF-insured institutions, like the
Banks, will pay 0.64 cents per $100 in domestic deposits. Full pro rata
sharing of the FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the BHCA to acquire an existing bank located in
another state without regard to state law. A bank holding company is not
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding
company if application of such limitation does not discriminate against out-
of-state banks or bank holding companies. An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of
time that may be prescribed by state law, except that a state may not impose
more than a five-year age requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.
The Interstate Act is likely to increase competition in the Company's market
areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
14
<PAGE>
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-
year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-
state banks in the markets in which the Company operates, although it is
difficult to assess the impact that such increased competition may have on the
Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending, service and
investment performance, rather than the extent to which the institution
conducts needs assessments, documents community outreach activities or
complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination:
overt evidence of discrimination, evidence of disparate treatment and evidence
of disparate impact.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." Based on an examination conducted
during the first quarter of 1996, MPB was rated outstanding. CNB, which was
rated satisfactory in 1995, is currently undergoing a CRA exam.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks, and their institution-
affiliated parties, which include Greater Bay, may be subject to potential
enforcement actions by the Federal Reserve, the FDIC, the Superintendent
and/or the Comptroller for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
the issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of the Banks), the
imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of
removal and prohibition orders against institution affiliated parties and the
imposition of restrictions and sanctions under the prompt corrective action
provisions of the FDIC Improvement Act. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action
against the holding company. Neither Greater Bay nor the Banks has been
subject to any such enforcement actions.
15
<PAGE>
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Discussions of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Reform
Act, and as such, may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Company operates, projections of future performance,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance and achievements
may differ materially from the results, performance or achievements expressed
or implied in such forward-looking statements. The following is a summary of
some of the important factors that could affect the Company's future results
of operations and/or its stock price, and should be considered carefully in
evaluating the Company.
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance of the Company will depend in part on the
Company's ability to successfully integrate the operations and management of
Mid-Peninsula and Cupertino and to implement its Super Community Banking
Philosophy. The Merger was effected in late November, 1996, and integration of
such operations and management are in the early stages. There can be no
assurance that the Company will be able to effectively and profitably
integrate the operations and management of Mid-Peninsula and Cupertino, or
that it will be able to profitably implement its Super Community Banking
Philosophy.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between the
cost of funds, primarily deposits, and the yield on earning assets. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence interest
rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. Fluctuations in interest
rates affect the demand of customers for the Company's products and services.
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities reprice or mature more slowly or more rapidly or on a
different basis than its interest-earning assets. Given the Company's current
volume and mix of interest-bearing liabilities and interest-earning assets,
the Company's interest rate spread could be expected to increase during times
of rising interest rates and, conversely, to decline during times of falling
interest rates. Although the Company believes its current level of interest
rate sensitivity is reasonable, significant fluctuations in interest rates may
have an adverse effect on the Company's results of operations.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are located in Northern California and concentrated
primarily in Santa Clara and San Mateo Counties, which include the area known
as the "Silicon Valley." As a result of the geographic concentration, the
Company's results depend largely upon economic conditions in these areas. A
deterioration in economic conditions in the Company's market areas,
particularly in the technology and real estate industries on which these areas
depend, could have a material adverse impact on the quality of the Company's
loan portfolio and the demand for its products and services, and accordingly,
its results of operations. See "Item 1. Business--Market Area."
GOVERNMENT REGULATION AND MONETARY POLICY
The banking industry is subject to extensive federal and state supervision
and regulation. Such regulation limits the manner in which Greater Bay and the
Banks conduct their respective businesses, undertake new investments and
activities and obtain financing. This regulation is designed primarily for the
protection of the deposit insurance funds and consumers, and not to benefit
holders of the Company's securities. Financial institution regulation has been
the subject of significant legislation in recent years, and may be the subject
of further significant legislation in the future, none of which is in the
control of the Company. Significant new laws or changes in, or repeals of,
existing laws may cause the Company's results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit
16
<PAGE>
conditions for the Company, primarily through open market operations in United
States government securities, the discount rate for bank borrowings and bank
reserve requirements, and a material change in these conditions would be
likely to have a material impact on the Company's results of operations. See
"Item 1. Business--Supervision and Regulation."
COMPETITION
The banking and financial services business in California generally, and in
the Banks' market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. The Banks compete for
loans, deposits and customers for financial services with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market
funds, credit unions, and other nonbank financial service providers. Many of
these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than the Banks. There can be no assurance that the Banks will be able
to compete effectively in their markets and the results of operations of the
Company could be adversely affected if circumstances affecting the nature or
level of competition change. See "Item 1. Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends substantially on certain members of its senior
management, in particular David L. Kalkbrenner, President and Chief Executive
Officer of Greater Bay and MPB, C. Donald Allen, President and Chief Executive
Officer of CNB, Steven C. Smith, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Greater Bay and Executive Vice
President and Chief Operating Officer of CNB, David R. Hood, Executive Vice
President and Chief Lending Officer of Greater Bay, Murray B. Dey, Executive
Vice President and Chief Credit Officer of MPB, and Hall Palmer, Executive
Vice President and Senior Trust Officer of Greater Bay. The Company's business
and financial condition could be materially adversely affected by the loss of
the services of any such individuals. The Company does not maintain key man
life insurance. See "Item 10. Directors and Executive Officers of Registrant--
Board of Directors and Executive Officers."
CREDIT QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Company's credit portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the Company's results of operations.
OTHER RISKS
From time to time, the Company details other risks with respect to its
business and financial results and conditions in its filings with the
Commission.
ITEM 2. PROPERTIES.
The Company occupies its administrative offices under a lease which expires
2002. MPB occupies its offices under leases expiring at various dates
(including options to renew) through 2009. CNB occupies its offices under
leases expiring at various dates (including options to renew through 2018.
The Company believes its present facilities are adequate for its present
needs and anticipated future growth. The Company believes that, if necessary,
it could secure suitable alternative facilities on similar terms without
adversely affecting operations.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in certain legal proceedings
arising in the normal course of its business. Management believes that the
outcome of these matters will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Special Meeting of Shareholders of Greater Bay (formerly Mid-Peninsula)
was held on October 30, 1996. At the meeting, the following matters were voted
upon:
1. The principal terms of the Second Amended and Restated Agreement and Plan
of Reorganization and Merger dated as of August 20, 1996, by and between Mid-
Peninsula Bancorp and Cupertino National Bancorp was approved by the following
vote:
<TABLE>
<S> <C>
Shares Voted For: 1,128,600
Shares Voted Against: 1,926
Shares Abstained: 1,441
Broker Nonvotes: 100,305
</TABLE>
2. The amendment to the Bylaws to change the authorized number of directors
to not less than 7 and not more than 13 and to fix the number of directors at
10 until changed as provided in the Bylaws was approved by the following vote:
<TABLE>
<S> <C>
Shares Voted For: 1,126,045
Shares Voted Against: 4,176
Shares Abstained: 1,746
Broker Nonvotes: 100,305
</TABLE>
3. The amendment to the Articles of Incorporation to establish super
majority vote requirements equal to a two-thirds vote of the Board of
Directors applicable to certain matters was approved by the following vote:
<TABLE>
<S> <C>
Shares Voted For: 1,113,202
Shares Voted Against: 14,253
Shares Abstained: 4,512
Broker Nonvotes: 100,305
</TABLE>
4. The Greater Bay Bancorp 1996 Stock Option Plan and authorization to
increase the total number of shares available for issuance pursuant to all
stock option plans of Greater Bay was approved by the following vote:
<TABLE>
<S> <C>
Shares Voted For: 1,116,989
Shares Voted Against: 7,320
Shares Abstained: 7,658
Broker Nonvotes: 100,305
</TABLE>
5. The proposal to change the name of Mid-Peninsula to Greater Bay Bancorp
was approved by the following vote:
<TABLE>
<S> <C>
Shares Voted For: 1,227,636
Shares Voted Against: 3,730
Shares Abstained: 906
Broker Nonvotes: 0
</TABLE>
6. The proposal to approve an amendment to the Articles of Incorporation
regarding indemnification and approve the form of indemnification agreements
for directors and officers was approved by the following vote:
<TABLE>
<S> <C>
Shares Voted For: 872,819
Shares Voted Against: 2,775
Shares Abstained: 4,842
Broker Nonvotes: 27,292
</TABLE>
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to September 9, 1996, the Company's Common Stock was not listed on any
exchange nor was it quoted by the NASDAQ Stock Market. It was, however, listed
with the National Quotation Service and on the Over The Counter (OTC) Bulletin
Board. Hoefer & Arnett, Incorporated and Van Kasper & Company acted as the
primary market makers and facilitated trades in the Company's Common Stock.
The Company's Common Stock was listed on the NASDAQ National Market on
September 9, 1996. Based on information provided to the Company from Hoefer &
Arnett, the range of high and low bid quotations for the Common Stock for 1995
and the first three quarters of 1996, are set forth below. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions. Quotations subsequent to September
30, 1996 reflect the high and low sales prices for the Company's Common Stock
as reported by The Nasdaq Stock Market, Inc.
<TABLE>
<CAPTION>
CALENDAR YEAR LOW HIGH CASH DIVIDENDS
------------- ------ ------ --------------
<S> <C> <C> <C>
1995
First Quarter................................. $13.00 $13.63 $0.10
Second Quarter................................ 13.00 15.25 0.10
Third Quarter................................. 15.25 17.00 0.10
Fourth Quarter................................ 15.75 16.88 0.10
1996
First Quarter................................. 16.50 18.75 0.15
Second Quarter................................ 17.75 22.50 0.15
Third Quarter................................. 18.00 21.00 0.15
Fourth Quarter................................ 24.38 21.13 0.15
</TABLE>
The Company estimates that the number of stockholders of record of the
Company at March 10, 1997 was approximately 900.
19
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1996 and 1995,
and its results of operations for the fiscal years ended December 31, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements, and notes thereto, of the Company appearing elsewhere in this
Prospectus. This information should be read in conjunction with such
consolidated financial statements and the notes thereto included elsewhere
herein. The selected consolidated financial data with respect to the Company's
consolidated financial position as of December 31, 1994, 1993 and 1992 and its
results of operations for the years ended December 31, 1993, and 1992 have
been derived from the audited consolidated financial statements of the
Company, which are not presented herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......... $ 45,037 $ 37,233 $ 27,801 $ 23,857 $ 22,736
Interest expense........ 16,213 13,892 8,512 6,497 7,506
--------- --------- --------- --------- ---------
Net interest income..... 28,824 23,341 19,289 17,360 15,230
Provision for loan
losses................. 2,036 956 1,823 1,945 1,132
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 26,788 22,385 17,466 15,415 14,098
Other income............ 3,530 2,306 3,295 3,578 2,127
Other expense........... 23,888 19,686 16,231 15,077 11,255
--------- --------- --------- --------- ---------
Income before income
taxes.................. 6,430 5,005 4,530 3,916 4,970
Provision for income
taxes.................. 2,927 1,971 1,966 1,473 1,825
--------- --------- --------- --------- ---------
Net income.............. $ 3,503 $ 3,034 $ 2,564 $ 2,443 $ 3,145
========= ========= ========= ========= =========
Net income per share.... $ 1.04 $ 0.96 $ 0.85 $ 0.84 $ 1.12
Average common shares
outstanding ........... 3,359,700 3,145,550 3,001,211 2,925,284 2,801,963
OPERATING RATIOS AND
OTHER DATA:
Return on average
assets(1).............. 0.65% 0.70 % 0.68 % 0.70 % 1.08 %
Return on average common
shareholders'
equity(1).............. 8.12% 7.98 % 7.31 % 7.56 % 10.50 %
Net interest margin..... 5.85% 5.83 % 5.62 % 5.61 % 5.54 %
Net (charge-offs)
recoveries to average
loans.................. 0.02% (0.35)% (0.49)% (0.61)% (0.31)%
FINANCIAL CONDITION DATA
(AT PERIOD END):
Assets.................. $ 622,044 $ 477,834 $ 401,614 $ 358,576 $ 325,168
Loans, net.............. 441,560 284,579 242,750 231,857 226,334
Investment
securities(2).......... 105,520 116,869 93,169 74,398 45,414
Deposits................ 559,283 431,789 345,294 323,300 292,110
Long-term debt.......... 3,000 3,000 -- -- --
Common shareholders'
equity................. 44,682 40,112 36,040 34,222 31,619
Book value per common
share.................. 13.80 13.17 12.90 13.17 13.07
FINANCIAL CONDITION
RATIOS:
Nonperforming assets to
total loans and OREO... 0.74% 1.17 % 2.23 % 1.59 % 2.01 %
Allowance for loan
losses to total loans.. 1.62% 1.52 % 1.79 % 1.58 % 1.37 %
Allowance for loan
losses to non-
performing loans....... 224.02% 131.59 % 80.24 % 98.84 % 66.93 %
REGULATORY CAPITAL
RATIOS:
Tier 1 capital.......... 8.75% 11.38 % 12.59 % 13.05 % 11.60 %
Total capital........... 10.54% 13.43 % 13.82 % 14.45 % 12.80 %
Leverage ratio.......... 7.27% 8.69 % 9.34 % 9.69 % 9.43 %
</TABLE>
- --------
(1) After excluding merger and other related costs of $2.8 million in 1996,
expenses related to litigation settlement, closing of the mortgage banking
business unit and terminated merger discussions of $2.1 million in 1995
and merger and other related costs of $608,000 in 1994, the ROA would have
been 1.02%, 0.99% and 0.78% in 1996, 1995 and 1994, respectively, and the
ROE would have been 12.86%, 11.35% and 8.35% in 1996, 1995 and 1994,
respectively.
(2) Includes available-for-sale securities and held-to-maturity securities.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the
"Company," on a consolidated basis) was formed as the result of the Merger
between Cupertino, the holding company for CNB, and Mid-Peninsula, the holding
company for MPB. The Merger, which has been accounted for as a pooling of
interests, was consummated in late November 1996. All of the financial
information for the Company for the periods prior to the Merger has been
restated to reflect the pooling of interests as if it occurred at the
beginning of the earliest reporting period presented.
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Item 6. Selected Consolidated Financial Data" and the Company's consolidated
financial statements and notes thereto and other financial data included
elsewhere herein. Certain statements under this caption constitute "forward-
looking statements" under the Reform Act which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuations in interest rates, credit quality and government
regulation. For additional information concerning these and other factors, see
"Item 1. Business--Summary of Business Considerations and Certain Factors That
May Affect Future Results of Operations and/or Stock Price."
RESULTS OF OPERATIONS
The Company reported net income of $3.5 million in 1996, a 15% increase over
1995 net income of $3.0 million. The net income in 1995 was an 18.3% increase
over 1994 net income of $2.6 million. Net income per share was $1.04 in 1996,
compared with $0.96 in 1995 and $0.85 in 1994. The return on average assets
and return on average shareholders' equity were 0.65% and 8.12% in 1996,
compared with 0.70% and 7.98% in 1995 and 0.68% and 7.31% in 1994,
respectively.
The increase in 1996 net income was the result of significant loan and
deposit growth, which resulted in increased net interest income, and increases
in trust fees, depositors' service fees and other fee income. Operating
expense increases required to service and support the Company's growth
partially offset the increase in revenues. The 1996 operating results included
$2.8 million ($2.0 million net of tax) in merger and other related charges.
Excluding these charges, the Company's net income, net income per share,
return on average assets and return on average shareholders' equity would have
been $5.5 million, $1.63, 1.02% and 12.86%, respectively.
The increase in net income in 1995 over 1994 was due primarily to increased
growth in interest-earning assets, which was partially offset by the growth in
operating expenses. The operating results in 1995 included $2.1 million ($1.3
million net of taxes) in charges related to the settlement of litigation, the
closing of CNB's mortgage banking business unit and terminated merger
discussions. Excluding these charges, the Company's net income, net income per
share, return on average assets and return on average shareholders' equity
would have been $4.3 million, $1.37, 1.00% and 11.39%, respectively.
NET INTEREST INCOME
Net interest income increased 23.8% to $29.2 million in 1996 from $23.6
million in 1995 primarily due to the $95.5 million, or 23.4%, increase in
average interest-earning assets coupled with an 8 basis point increase in the
Company's interest rate spread. Net interest income increased 21.2% in 1995
from $19.5 million in 1994 primarily due to the combined effects of the $58.0
million, or 16.8%, increase in average interest-earning assets and the 2 basis
point increase in the Company's interest rate spread.
21
<PAGE>
The following table presents, for the years indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and
rates paid on average interest-bearing liabilities. Average balances are
averaged daily balances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2)............... $350,679 $36,278 10.35% $260,635 $28,397 10.90% $230,126 $22,112 9.61%
Investment securities,
short term investment
and cash
equivalents(3)........ 148,118 9,115 6.15% 143,665 9,070 6.31% 116,143 5,852 5.04%
-------- ------- -------- ------- -------- -------
Total interest-
earning assets(3)... 498,797 45,393 9.10% 404,300 37,467 9.27% 346,269 27,964 8.08%
Noninterest-earning 40,013 30,448 30,532
assets................. -------- ------- -------- ------- -------- -------
Total assets......... $538,810 $45,393 $434,748 $37,467 $376,801 $27,964
======== ======= ======== ======= ======== =======
INTEREST-BEARING
LIABILITIES:
Deposits:
NOW and MMDA........... $246,183 $ 8,656 3.52% $204,521 $ 7,868 3.85% $173,619 $ 4,945 2.85%
Savings deposits....... 38,429 1,714 4.46% 9,541 539 5.65% 9,599 466 4.85%
Time deposits.......... 99,635 5,362 5.38% 89,539 4,641 5.18% 73,793 2,719 3.68%
-------- ------- -------- ------- -------- -------
Total deposits....... 384,247 15,732 4.09% 303,601 13,048 4.30% 257,011 8,130 3.16%
Borrowings............. 8,191 481 5.87% 13,334 844 6.33% 7,788 382 4.90%
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities. 392,438 16,213 4.13% 316,935 13,892 4.38% 264,799 8,512 3.21%
-------- ------- -------- ------- -------- -------
Noninterest-bearing
deposits............... 102,689 77,727 75,244
Other noninterest-
bearing liabilities.... 883 2,038 1,684
Shareholders' equity.... 42,800 38,048 35,074
-------- -------- ------- --------
Total liabilities and
shareholders'
equity.............. $538,810 $16,213 $434,748 $13,892 $376,801 $ 8,512
======== ======= ======== ======= ======== =======
Net interest income..... $29,180 $23,575 $19,452
Interest rate spread.... 4.97% 4.89% 4.87%
Contribution of interest
free funds............. 0.88% 0.94% 0.75%
Net yield on interest-
earnings assets(4)..... 5.85% 5.83% 5.62%
</TABLE>
- -------
(1) Non-accrual loans are included in the average balance; however, only
collected interest is included in the interest column.
(2) Loan fees totaling $2.4 million, $1.5 million and $1.4 million are
included in loan interest income for the years 1996, 1995 and 1994,
respectively.
(3) Interest income includes $356,000, $234,000 and $163,000 in 1996, 1995 and
1994, respectively, to adjust to a fully taxable equivalent basis using
the federal statutory rate of 34%.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
22
<PAGE>
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities.
The volume of earning dollars in loans and investments, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings,
combined with the spread, produces the changes in the net interest income
between periods. The table below sets forth, for the periods indicated, a
summary of the changes in interest income and interest expense resulting from
changes in average asset and liability balances (volume) and changes in
average interest rates (rate). The change in interest attributable to
simultaneous volume and rate changes have been reflected as volume variances.
Non-accrual loans are included in average loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1995
COMPARED WITH DECEMBER COMPARED WITH DECEMBER
31, 1995 FAVORABLE 31, 1994 FAVORABLE
(UNFAVORABLE) (UNFAVORABLE)
------------------------- -------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON INTER-
EST-EARNING ASSETS:
Interest income on loans. $ 9,811 $(1,930) $ 7,881 $ 2,932 $ 3,353 $ 6,285
Interest income on in-
vestment securities,
short-term investments
and cash equivalents
(1)..................... 281 (236) 45 1,387 1,831 3,218
------- ------- ------- ------- ------- -------
Total interest income.. 10,092 (2,166) 7,926 4,319 5,184 9,503
------- ------- ------- ------- ------- -------
INTEREST EXPENSE ON DE-
POSITS:
NOW and MMDA........... (1,603) 815 (788) (880) (2,043) (2,923)
Savings deposits....... (1,632) 457 (1,175) 3 (76) (73)
Time deposits.......... (523) (198) (721) (580) (1,342) (1,922)
------- ------- ------- ------- ------- -------
Total interest expense on
deposits................ (3,758) 1,074 (2,684) (1,457) (3,461) (4,918)
Interest expense on
borrowings.............. 326 37 363 (272) (190) (462)
------- ------- ------- ------- ------- -------
Total interest expense. (3,432) 1,111 (2,321) (1,729) (3,651) (5,380)
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income..... $ 6,660 $(1,055) $ 5,605 $ 2,590 $ 1,533 $ 4,123
======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Interest income includes $356,000, $234,000 and $163,000 for 1996, 1995
and 1994, respectively, to adjust to a fully taxable equivalent basis
using the federal statutory rate of 34%.
Interest income in 1996 increased 21.2% to $45.4 million from $37.5 million
in 1995. This was primarily due to the significant increase in loans, the
Company's highest yielding asset. Loan volume increases were the result of an
improving economy in the Company's market areas, as well as the addition of
experienced relationship managers and greater business development efforts by
the Company's relationship managers. This increase was partially offset by a
decline in the yield earned on average interest-earning assets. While average
interest-earning assets increased $94.5 million, or 23.4%, to $498.8 million
in 1996, compared to $404.3 million in 1995, average loans increased $90.0
million, or 34.5%, to $350.7 million, or 70.3% of average interest-earning
assets, in 1996 from $260.6 million, or 64.4% of average interest-earning
assets, in 1995. Conversely, other interest-earning assets, consisting of
investment securities, federal funds sold and other short-term investments,
increased only 3.1% to $148.1 million, or 29.7% of average interest-earning
assets, in 1996 from $143.7 million, or 35.6% of average interest-earning
assets, in 1995.
The average yield on interest-earning assets declined 17 basis points to
9.10% in 1996 from 9.27% in 1995 primarily due to the decline in yields on
loans. Average yields on loans declined 55 basis points to 10.35% in 1996 from
10.90% in 1995 primarily due to competition. The average yield on other
interest-earning assets declined 16 basis points to 6.15% in 1996, compared to
6.31% in 1995.
Interest expense in 1996 increased 16.7% to $16.2 million from $13.9 million
in 1995. This increase was due to greater volumes of interest-bearing
liabilities which was partially offset by lower interest rates paid on
interest-bearing liabilities. Average interest-bearing liabilities increased
23.8% to $392.4 million in 1996 from
23
<PAGE>
$316.9 million in 1995 due to the efforts of the Banks' relationship managers
and deposits derived from the activities of the Greater Bay Trust Company and
the Venture Lending Group. During 1996, the average rate paid on interest-
bearing liabilities declined 25 basis points to 4.13% from 4.38% in 1995 due
to the repricing of deposit accounts.
During 1996, average noninterest bearing deposits increased to $102.7
million from $77.7 million in 1995. As a result of such increase, noninterest
bearing deposits comprised 25.2% of total deposits at year end 1996, compared
to 22.2% at year end 1995.
As a result of the foregoing, the Company's interest rate spread increased
to 4.97% in 1996 from 4.89% in 1995 and the net yield on interest-earning
assets increased slightly in 1996 to 5.85% from 5.83% in 1995.
Interest income increased 34.0% to $37.7 million in 1995 from $28.0 million
in 1994, as a result of the combined effects of increases in average interest-
earning assets and the yields earned on such assets. Average interest-earning
assets increased 16.8% to $404.3 million in 1995 from $346.3 million in 1994
as a result of almost equivalent increases in both loans and other interest-
earning assets. The average yield on the higher volume of average interest-
earning assets increased 119 basis points to 9.27% in 1995 from 8.08% in 1994,
primarily as a result of increases in market rates of interest.
Interest expense in 1995 increased 63.2% to $13.9 million from $8.5 million
in 1994, primarily as a result of the combined effect of increases in rates
paid on interest-bearing liabilities and the volume of interest-bearing
liabilities. As a result of increases in market rates of interest, the average
rate paid on average interest-bearing liabilities increased 117 basis points
to 4.38% in 1995 from 3.21% in 1994. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 19.7%
to $316.9 million in 1995 from $264.8 million in 1994.
As a result of the foregoing, the Company's interest rate spread increased
to 4.89% in 1995 from 4.87% in 1994 and the net yield on interest-earning
assets increased to 5.83% in 1995 from 5.62% in 1994.
The Company has noninterest-bearing liabilities on which it pays for certain
client service expenses. These expenses include messenger services, check
supplies and other related items and are included in operating expenses. If
these costs had been included in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the years presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average noninterest-bearing demand deposits. $102,689 $77,727 $75,244
Client services expenses.................... 411 337 376
Client services expenses annualized......... 0.40 % 0.43 % 0.50 %
IMPACT ON NET YIELD ON INTEREST-EARNING
ASSETS:
Net yield on interest-earning assets........ 5.85 % 5.83 % 5.62 %
Impact of client services expense........... (0.08)% (0.08)% (0.11)%
-------- ------- -------
Adjusted net yield on interest-earning as-
sets....................................... 5.77 % 5.75 % 5.51 %
======== ======= =======
</TABLE>
- --------
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield on interest-earning assets.
The impact on the net yield on interest-earning assets is caused by off-
setting net interest income by the cost of client services expenses, which
reduces the yield on interest-earning assets. The cost for client services
expense is trending down and reflects the Company's efforts to manage its
client services expenses.
24
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses creates an allowance for future loan losses.
The loan loss provision for each year is dependent on many factors, including
loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of the quality of the loan
portfolio, the value of the underlying collateral on problem loans and the
general economic conditions in the Company's market area. The Company performs
a monthly assessment of the risk inherent in its loan portfolio, as well as a
detailed review of each asset determined to have identified weaknesses. Based
on this analysis, which includes reviewing historical loss trends, current
economic conditions, industry concentrations and specific reviews of assets
classified with identified weaknesses, the Company makes provisions for
potential loan losses. Specific allocations are made for loans where the
probability of a loss can be defined and reasonably determined, while the
balance of the provisions for loan losses are based on historical data,
delinquency trends, economic conditions in the Company's market area and
industry averages. Annual fluctuation in the provision for loan losses result
from management's assessment of the adequacy of the allowance for loan losses,
and ultimate loan losses may vary from current estimates.
The provision for loan losses in 1996 was $2.0 million, compared to $0.9
million in 1995 and $1.8 million in 1994. In addition, in connection with the
Merger, the Company made an $800,000 additional provision for loan losses to
conform the Banks' reserve allocation methodologies, which is included in
operating expenses. The increased provision for loan losses during 1996
reflects the $160.5 million increase in gross loans outstanding at December
31, 1996 from year-end 1995. Notwithstanding the substantial increase in loans
outstanding, non-performing loans, comprised of non-accrual loans and accruing
loans past due 90 days or more, declined to $3.1 million or 0.69% of loans
outstanding at December 31, 1996 from $3.3 million or 1.15% of loans
outstanding at December 31, 1995. The $1.8 million provision for loan losses
during 1994 reflected the higher level of non-performing loans experienced by
the Company during 1994. At December 31, 1994, non-performing loans were
$5.0 million, or 2.07% of loans outstanding at such date.
For further information on non-performing and classified loans and the
allowance for loan losses, see "--Financial Condition--Non-Performing and
Classified Assets" herein.
OTHER INCOME
Total other income increased to $3.5 million in 1996, compared to $2.3
million in 1995 and $3.3 million in 1994. The following table sets forth
information by category of other income in the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Trust fees........................................... $1,426 $ 710 $ 593
Depositors' service fees............................. 1,045 671 699
Gain on sale of SBA loans............................ 519 366 685
Gain on sale of mortgage loans....................... -- 137 993
Loan documentation fees, net......................... (42) 103 276
Investment gains/(losses)............................ (263) (113) (266)
Other................................................ 845 432 315
------ ------ ------
Total.............................................. $3,530 $2,306 $3,295
====== ====== ======
</TABLE>
The increase in other income in 1996 is primarily the result of a $716,000
increase in trust fees and a $374,000 increase in depositors' service fees.
The trust fee increase is due to significant growth in assets under management
in Greater Bay Trust Company. Trust assets increased to $418.0 million at
year-end 1996, compared to $270.0 million at December 31, 1995 and $157.0
million at December 31, 1994. Depositors' service fees increased due to growth
in deposits.
The decrease in other income in 1995 from 1994 is due primarily to the
decline in the activities of the mortgage banking business unit. This unit
generated $137,000 in gains on the sale of mortgage loans in 1995, compared to
$993,000 in 1994. In early 1995, the Company closed the mortgage banking
business unit due to the sharp rise in interest rates during 1994 and the
impact the rising rates had on originations.
25
<PAGE>
The fluctuation in gain on sale of SBA loans is due primarily to the mix of
SBA loans originated for sale combined with the effect of market pricing on
loans sold. SBA loans with longer maturities command a higher premium than
loans with shorter maturity periods. In 1996 compared to 1995, the Company
originated and sold fewer long-term real estate loans and the pricing on loans
sold declined slightly. During 1995 compared to 1994, the Company generated
more long-term commercial real estate loans that were sold in the secondary
market, thus causing the increase in gain on sale of SBA loans. In addition,
lower market interest rates in 1994 provided higher premiums on SBA loan
sales.
OPERATING EXPENSES
Operating expenses totaled $23.9 million for 1996, compared to $19.7 million
for 1995 and $16.2 million for 1994. The ratio of operating expenses to
average assets was 4.43% in 1996, 4.53% in 1995, and 4.31% in 1994. Operating
expenses in 1996 and 1994 included $2.8 million and $608,000, respectively, in
merger and other related costs, while 1995 operating expenses included $2.2
million related to the settlement of litigation, the closing of CNB's mortgage
banking business unit and terminated merger discussions. Excluding these
costs, operating expenses to average assets would have been 3.92% in 1996,
4.04% in 1995 and 4.15% in 1994.
The efficiency ratio is computed by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio for 1996 was 73.83%,
compared to 76.76% in 1995 and 71.87% in 1994. Excluding nonrecurring costs,
the Company's efficiency ratios were 65.21%, 68.43% and 69.18% in 1996, 1995
and 1994, respectively. The decline in the Company's efficiency ratio was due
to the investment in infrastructure in 1994 and early 1995 which allowed the
Company to grow its revenue base in 1995 and 1996 without significant
increases in operating expenses.
The following table represents the major components of operating expenses
for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits........................... $11,773 $10,146 $ 8,505
Occupancy and equipment............................. 3,401 2,679 2,226
Merger/restructuring costs.......................... 2,791 -- 608
Professional services and legal costs............... 1,270 2,968 1,176
FDIC insurance and regulatory assessments........... 102 551 858
Other real estate, net.............................. 35 62 112
Other............................................... 4,105 2,943 2,370
------- ------- -------
Total operating expenses before client services ex-
penses............................................. 23,477 19,349 15,855
Client services expenses............................ 411 337 376
------- ------- -------
Total operating expenses.......................... $23,888 $19,686 $16,231
======= ======= =======
Nonrecurring costs(1)............................... 2,791 2,135 608
------- ------- -------
Total operating expenses excluding nonrecurring
costs(1)......................................... $21,097 $17,551 $15,623
======= ======= =======
Efficiency ratio before client services............. 72.56% 75.44% 70.20%
Efficiency ratio.................................... 73.83% 76.76% 71.87%
Efficiency ratio, excluding nonrecurring costs(1)... 65.21% 68.43% 69.18%
Total operating expenses to average assets.......... 4.43% 4.53% 4.31%
Total operating expenses to average assets, exclud-
ing nonrecurring costs(1).......................... 3.92% 4.04% 4.15%
</TABLE>
- --------
(1) Nonrecurring costs include merger and related costs for 1996 and 1994 and
costs related to the settlement of litigation, the closing of CNB's
mortgage banking business unit and terminated merger discussions in 1995.
26
<PAGE>
Compensation and benefits expenses increased in 1996 to $11.8 million,
compared to $10.1 million in 1995 and $8.5 million in 1994, primarily due to
the addition of personnel at Greater Bay Trust Company and an increase in the
number of relationship managers at the Banks.
The increase in occupancy and equipment expense in 1996 was primarily due to
the opening of CNB's new Emerson office and the Greater Bay Trust Company
office in downtown Palo Alto, California. The increase in occupancy and
equipment expense in 1995 was due to the installation of a larger data
processing system, which included a local and wide area network to connect all
of the CNB office locations.
Expenses for professional services and legal costs, including consulting and
audit services, decreased to $1.3 million in 1996, compared to $3.0 million in
1995 and $1.2 million in 1994. The decrease in 1996 is primarily attributable
to a one-time charge of $1.8 million in 1995 for a legal settlement related to
trust department activities.
Client services expenses increased to $411,000 in 1996, compared to $337,000
in 1995 and $376,000 in 1994 as a result of an increase in the volume of
noninterest-bearing demand deposits from commercial customers for which the
Company provides services. These expenses include messenger services, check
supplies and other related items. For information concerning the impact of
these expenses on net yield on interest-earning assets, see "--Net Interest
Income" herein.
FDIC deposit insurance and Office of the Comptroller of the Currency
regulatory assessments decreased to $102,000 in 1996, compared to $551,000 in
1995, and $858,000 in 1994. The decline in FDIC insurance expense is a result
of the lowering of deposit insurance premiums by the FDIC when the Bank
Insurance Fund was fully funded as of March 1995.
The increase in other operating expense in 1996 was related to the rapid
growth in the Company's loan and deposit portfolios and trust assets. The
principal expense increases were $570,000 in marketing expenses, $80,000 in
trust data processing charges and $236,000 in supplies and postage expenses.
The increase in 1995 over 1994 was also primarily in marketing, trust and
supplies and postage expenses.
INCOME TAXES
The Company's income tax rate for 1996 was 45.5%, compared to 39.4% in 1995
and 36.4% in 1994. The effective rate in 1996 was higher than the statutory
rate due to the impact of nondeductible merger expenses.
FINANCIAL CONDITION
Total assets increased 30.2% to $622.0 million at December 31, 1996,
compared to $477.8 million at December 31, 1995. Total assets increased 19.0%
in 1995 from $401.6 million at December 31, 1994. The increases in 1996 and
1995 were primarily due to increases in the Company's loan portfolio funded by
growth in deposits.
LOANS
Total gross loans increased 55.3% to $450.8 million at December 31, 1996,
compared to $290.3 million at December 31, 1995. Total gross loans increased
19.5% in 1995 from $243.0 million at year-end 1994. The increases in loan
volumes in 1996 and 1995 were due to an improving economy in the Company's
market areas coupled with the business development efforts by the Company's
relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the
balance in consumer loans. While no specific industry concentration is
considered significant, the Company's lending operations are located in the
Company's market areas that are dependent on the technology and real estate
industries and their supporting companies. Thus, the Company's borrowers could
be adversely impacted by a downturn in these sectors of the economy which
could reduce the demand for loans and adversely impact the borrowers'
abilities to repay their loans.
27
<PAGE>
The following table presents the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $257,042 58.2 % $181,617 63.8 % $158,223 65.2 % $145,673 62.8 % $130,561 57.7 %
Real estate construction
& land.................. 78,278 17.7 32,672 11.5 22,725 9.4 23,742 10.2 33,315 14.7
Commercial real estate
term.................... 72,802 16.5 47,322 16.6 31,666 13.0 12,075 5.2 11,225 5.0
Consumer & other........ 42,702 9.7 28,666 10.1 30,361 12.5 47,768 20.6 50,510 22.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross..... 450,824 102.1 290,277 102.0 242,975 100.1 229,258 98.9 225,611 99.7
Deferred fees and (1,952) (0.4) (1,299) (0.5) (1,264) (0.5) (1,369) (0.6) (1,019) (0.5)
discounts............... -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, net of $448,872 101.7 % $288,978 101.5 % $241,711 99.6 % $227,889 98.3 % $224,592 99.2 %
deferred fees......... ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Allowance for loan (7,312) (1.7) (4,399) (1.5) (4,344) (1.8) (3,657) (1.6) (3,099) (1.4)
losses.................. -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans.............. $441,560 100.0 % $284,579 100.0 % $237,367 97.8 % $224,232 96.7 % $221,493 97.9 %
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Loans held for sale..... -- -- -- -- 5,383 2.2 7,625 3.3 4,841 2.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans............ $441,560 100.0 % $284,579 100.0 % $242,750 100.0 % $231,857 100.0 % $226,334 100.0 %
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table presents the maturity distribution of the Company's
commercial, real estate construction and land and commercial real estate term
portfolios and the sensitivity of such loans to changes and interest rates at
December 31, 1996.
<TABLE>
<CAPTION>
COMMERCIAL
REAL ESTATE REAL
CONSTRUCTION ESTATE
COMMERCIAL & LAND TERM
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan due in:
One year or less:
Floating rate........................... $186,260 $62,484 $23,257
Fixed rate.............................. 14,918 1,678 2,226
One to five years:
Floating rate........................... 36,552 3,904 10,813
Fixed rate.............................. 5,701 4,534 6,335
After five years:
Floating rate........................... 21 -- --
Fixed rate.............................. 13,590 5,678 30,171
-------- ------- -------
Total $257,042 $78,278 $72,802
======== ======= =======
</TABLE>
For additional information concerning the Company's loan portfolio and its
underwriting and credit administration policies and procedures, see "Item 1.
Business--Lending Activities."
NON-PERFORMING AND CLASSIFIED ASSETS
Management generally places loans on non-accrual when they become 90 days
past due, unless they are well secured and in the process of collection. When
a loan is placed on non-accrual status, any interest previously accrued but
not collected is reversed from income. Loans are charged off when management
determines that collection has become unlikely. Restructured loans are those
where the Banks have granted a concession on the interest paid or original
repayment terms due to financial difficulties of the borrower. Other real
estate owned consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
28
<PAGE>
The following table sets forth information regarding non-performing assets
at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans
Non-accrual loans.................... $1,875 $2,513 $3,668 $1,179 $ 913
Accruing loans past due 90 days or
more................................ 1,237 830 1,371 1,903 --
Restructured loans................... -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans......... 3,112 3,343 5,039 3,082 913
Other real estate owned................ 152 -- 375 618 3,717
------ ------ ------ ------ ------
Total non-performing assets........ $3,264 $3,343 $5,414 $3,700 $4,630
====== ====== ====== ====== ======
Non-performing assets to total loans
and other real estate owned........... 0.74% 1.17% 2.23% 1.59% 2.01%
</TABLE>
At December 31, 1996, the Company had $1.9 million in non-accrual loans.
Non-accrual loans included 11 loans with aggregate principal balances ranging
from $3,000 to $962,000. Interest income foregone on non-performing loans
outstanding at year end totaled $215,000, $245,000 and $275,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company records other real estate at the lower of carrying value or fair
value less estimated costs to sell. Estimated losses that result from the
ongoing periodic valuation of these properties are charged to earnings with a
provision for losses on foreclosed property in the period in which they are
identified. At December 31, 1996, other real estate owned consisted of one
property acquired through foreclosure with a carrying value of $152,000.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined weaknesses and are characterized by the distinct possibility that the
Banks will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. A loan classified loss is considered
uncollectible and its continuance as an asset is not warranted.
The following table sets forth classified loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------ ------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Substandard............................................ $7,759 $7,463 $12,676
Doubtful............................................... 1,664 601 1,781
Loss................................................... -- -- --
------ ------ -------
Total................................................ $9,423 $8,064 $14,457
====== ====== =======
Classified loans to total loans........................ 2.13% 2.83% 5.96%
Allowance for loan losses to classified loans.......... 77.60% 54.55% 30.05%
</TABLE>
With the exception of these classified loans, management is not aware of any
loans as of December 31, 1996 where the known credit problems of the borrower
would cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included in the non-performing asset table above at
some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full
impact such an environment may have on the Company's loan portfolio.
Accordingly, there can be no assurance that other loans will not become 90
days or more past due, be placed on non-accrual or become restructured loans,
in substance foreclosures or other real estate owned in the future.
29
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in its loan portfolio
and economic conditions in the Company's market areas. See "--Results of
Operations--Provision for Loan Losses" herein. The allowance is increased by
provisions charged against earnings and reduced by net loan charge-offs. Loans
are charged off when they are deemed to be uncollectible; recoveries are
generally recorded only when cash payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans $350,679 $260,635 $230,126 $226,384 $207,978
outstanding:........... ======== ======== ======== ======== ========
Allowance for loan
losses:
Balance at beginning of
period................. $ 4,399 $ 4,344 $ 3,657 $ 3,099 $ 2,605
Charge-offs:
Commercial............ (119) (973) (798) (1,264) (539)
Real estate
construction & land.. (60) (7) (308) 0 (62)
Commercial real estate
term................. 0 0 0 (50) 0
Consumer & other...... (120) (101) (141) (159) (145)
-------- -------- -------- -------- --------
Total charge-offs... (299) (1,081) (1,247) (1,473) (746)
-------- -------- -------- -------- --------
Recoveries:
Commercial............ 343 178 57 28 9
Real estate
construction & land... 15 0 0 0 95
Commercial real estate
term.................. 0 0 48 10 0
Consumer & other...... 18 2 6 48 4
-------- -------- -------- -------- --------
Total recoveries.... 376 180 111 86 108
-------- -------- -------- -------- --------
Net (charge-offs)
recoveries............ 77 (901) (1,136) (1,387) (638)
Provision charged to
income.................. 2,836 956 1,823 1,945 1,132
-------- -------- -------- -------- --------
Balance at end of
period.................. $ 7,312 $ 4,399 $ 4,344 $ 3,657 $ 3,099
======== ======== ======== ======== ========
Net (charge-offs)
recoveries to average
loans outstanding
during the period...... 0.02 % (0.35)% (0.49)% (0.61)% (0.31)%
Allowance as a
percentage of average
loans outstanding...... 2.08 % 1.69 % 1.89 % 1.62 % 1.49 %
Allowance as a
percentage of non-
performing loans....... 224.02 % 131.59 % 80.24 % 98.84 % 66.93 %
</TABLE>
Management considers changes in the size and character of the loan
portfolio, changes in non-performing and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in
the portfolio and if the economy declines or asset quality deteriorates,
additional provisions could be required.
30
<PAGE>
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocations presented should not be interpreted as an indication that charges
to the allowance for loan losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan
category represents the total amount available for future losses that may
occur within these categories. The unallocated portion of the allowance for
loan losses and the total allowance is applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $3,134 57.02% $1,797 62.57% $2,835 63.71% $2,093 61.50% $1,668 56.65%
Real estate--
construction & land.... 1,045 17.36 223 11.26 224 9.15 349 10.02 344 14.46
Commercial real estate--
term................... 532 16.15 696 16.30 132 12.75 391 5.10 56 4.87
Consumer & other........ 383 9.47 466 9.87 543 12.22 270 20.17 459 21.92
Loans held for sale..... -- -- -- -- 14 2.17 27 3.21 23 2.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allocated......... 5,094 3,182 3,748 3,130 2,550
Unallocated............. 2,218 1,217 596 527 549
------ ------ ------ ------ ------
Total.................. $7,312 100.00% $4,399 100.00% $4,344 100.00% $3,657 100.00% $3,099 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT SECURITIES
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of
U.S. Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions and a modest
amount of equity securities including Federal Reserve Bank stock and Federal
Home Loan Bank stock. Federal funds sold are additional investments which are
not classified as investment securities. Investment securities classified as
available-for-sale are recorded at fair market value, while investment
securities classified as held-to-maturity are recorded at cost. Unrealized
gains or losses, net of the deferred tax effect, are reported as increases or
decreases in shareholders' equity for available-for-sale securities.
31
<PAGE>
The amortized cost and estimated market value of investment securities at
December 31, 1996 is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations......... $ 19,841 $ 52 $ (6) $ 19,887
U.S. Agency obligations:
Mortgage-backed obligations..... 3,604 5 (53) 3,556
Fixed and variable rate notes... 10,568 34 (13) 10,589
Mutual funds...................... 2,000 -- (52) 1,948
Tax exempt securities............. 7,758 154 (11) 7,901
Corporate securities.............. 3,216 7 -- 3,223
-------- ---- ----- --------
Total securities available-
for-sale..................... 46,987 252 (135) 47,104
-------- ---- ----- --------
Held-to-maturity securities:
U.S. Treasury obligations......... 1,005 3 -- 1,008
U.S. Agency obligations:
Mortgage-backed obligations..... 7,086 87 (9) 7,164
Fixed and variable rate notes... 38,390 78 (100) 38,368
Other mortgage-backed obligations. 3,959 54 -- 4,013
Tax exempt securities............. 6,525 219 (3) 6,741
Federal Reserve Bank stock........ 673 -- -- 673
Federal Home Loan Bank stock...... 778 -- -- 778
-------- ---- ----- --------
Total securities held-to-
maturity..................... 58,416 441 (112) 58,745
-------- ---- ----- --------
Total investment securities... $105,403 $693 $(247) $105,849
======== ==== ===== ========
</TABLE>
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
32
<PAGE>
The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity at December 31, 1996.
<TABLE>
<CAPTION>
1998 2002 2007
1997 THROUGH 2001 THROUGH 2007 AND THEREAFTER TOTAL
------- ------------ ------------ -------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
SECURITIES:
U.S. Treasury
obligations............ $15,003 $ 4,838 $ -- $ -- $ 19,841
U.S. Agency obligations:
Mortgage-backed
obligations(1)....... 599 3,005 -- -- 3,604
Fixed and variable
rate notes(2)........ 1,500 9,068 -- -- 10,568
Mutual funds(3)......... 2,000 -- -- -- 2,000
Tax exempt securities... 453 1,567 3,623 2,115 7,758
Corporate securities.... 1,178 2,038 -- -- 3,216
------- ------- ------- ------- --------
Total securities
available-for-sale. 20,733 20,516 3,623 2,115 46,987
Market value............ 20,708 20,524 3,672 2,200 47,104
HELD-TO-MATURITY
SECURITIES:
U.S. Treasury
obligations............ 503 502 -- -- 1,005
U.S. Agency obligations:
Mortgage-backed
obligations(1)....... -- 69 2,595 4,422 7,086
Fixed and variable
rate notes(2)........ 3,000 17,999 15,391 2,000 38,390
Other mortgage-backed
obligations(1)......... -- -- -- 3,959 3,959
Tax exempt securities... -- 1,040 256 5,229 6,525
Federal Reserve Bank
stock.................. -- -- -- 673 673
Federal Home Loan Bank
stock.................. -- -- -- 778 778
------- ------- ------- ------- --------
Total securities
held-to-maturity... 3,503 19,610 18,242 17,061 58,416
Market value............ 3,493 19,549 18,369 17,334 58,745
COMBINED INVESTMENT
SECURITIES PORTFOLIO:
Total investment
securities............. 24,236 40,126 21,865 19,176 105,403
Total market value...... 24,201 40,073 22,041 19,534 105,849
Weighted average yield-
total portfolio(4)..... 5.32% 6.19% 7.04% 6.77% 6.29%
</TABLE>
- --------
(1) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations may be
called, without penalty, at the discretion of the issuer. This may cause
the actual maturities to differ significantly from the contractual
maturity dates.
(3) Mutual funds with no stated maturity total $2.0 million ($1.9 million
market value).
(4) Yields on tax exempt securities have been computed on a fully tax-
equivalent basis.
For additional information concerning the investment portfolio, see Note 3
of Notes to Consolidated Financial Statements.
DEPOSITS
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $559.3
million at December 31, 1996, an increase of 29.5% compared to deposits of
$431.8 million at December 31, 1995. In 1995, deposits increased 25.1% from
$345.3 million at December 31, 1994.
Total average interest-bearing deposits increased 21.0% to $384.2 million
for 1996, compared to an average of $303.6 million for 1995. In 1995, average
interest-bearing deposits increased 18.1% over average deposits of $257.0
million in 1994. The increase in deposits was due to the continued marketing
efforts directed at commercial business clients in the Company's market areas,
coupled with an increase in deposits related to the activities of the Greater
Bay Trust Company and the Venture Lending Group.
33
<PAGE>
Noninterest-bearing deposits were $139.9 million at December 31, 1996,
compared to $96.1 million at December 31, 1995 and $81.0 million at December
31, 1994. Average noninterest-bearing deposits in 1996 were $102.7 million,
compared to $77.7 million in 1995 and $75.2 million in 1994. As its regional
offices expand, the Company anticipates this funding source to increase.
Money market and other interest-bearing demand accounts reached $419.3
million at year-end 1996, an increase of 24.9% from the prior year. Money
market and other interest-bearing demand deposits of $335.7 million at
December 31, 1995 were up 26.5% from $265.3 million at December 31, 1994.
Time certificates of deposit of more than $100,000, savings and other time
deposits totaled $68.2 million, or 12.2% of total deposits, at December 31,
1996, compared to $63.8 million, or 14.8% of total deposits, at December 31,
1995 and $54.5 million, or 15.7%, of total deposits at December 31, 1994.
The following table sets forth the maturing distribution of time
certificates of deposit of $100,000 or more at December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less..................................... $54,233
Three to six months...................................... 9,198
Six to twelve months..................................... 4,252
Over twelve months....................................... 487
-------
Total.................................................. $68,170
=======
</TABLE>
As of December 31, 1996, the Company had $20.6 million in brokered deposits
outstanding.
LIQUIDITY AND CASH FLOW
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients, while maintaining an appropriate balance between assets and
liabilities to meet the return on investment requirements of its shareholders.
The Company monitors the sources and uses of funds on a daily basis to
maintain an acceptable liquidity position. In addition to liquidity from core
deposits and repayments and maturities of loans and investments, the Banks
utilize brokered deposit lines, sell securities under agreements to repurchase
and borrow overnight federal funds. In addition, during 1995 the Company
issued $3.0 million of subordinated notes.
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are
obtained from interest received and dividends declared and paid by the Banks.
There are statutory and regulatory provisions that could limit the ability of
the Banks to pay dividends to Greater Bay. See "Item 1. Business--Supervision
and Regulation." At December 31, 1996, the Banks had approximately $6.3
million in the aggregate available to be paid as dividends to Greater Bay.
Management of Greater Bay believes that such restrictions will not have an
impact on the ability of Greater Bay to meet its ongoing cash obligations. As
of December 31, 1996, the Company did not have any material commitments for
capital expenditures.
Net cash provided by operating activities, primarily representing net
interest income, totaled $6.2 million for 1996, $10.2 million for 1995 and
$6.4 million for 1994. Cash used for investing activities totaled $150.3
million in 1996, $78.4 million in 1995 and $31.4 million in 1994. The funds
used for investing activities primarily represent increases in loans and
investments for each year reported.
For the year ended December 31, 1996, net cash provided by financing
activities was $139.9 million. Historically, the primary financing activity of
the Company has been deposits and short-term borrowings. Deposits increased
$127.5 million for the year ended December 31, 1996 and short-term borrowings
increased
34
<PAGE>
$12.0 million for the same period. For the year ended December 31, 1995, net
cash provided by financing activities was $71.4 million. Deposits increased
$85.5 million, while short-term borrowings decreased $17.3 million. Net
proceeds from subordinated notes issued in the third quarter of 1995 provided
$3.0 million.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1996 increased to $44.7 million from
$40.1 million at December 31, 1995 and from $36.0 million at December 31,
1994. During 1996, the Company paid aggregate cash dividends of $0.44 per
share.
The Company has provided the majority of its capital requirements through
the retention of earnings. In the third quarter of 1995, the Company increased
its capital base by raising $3.0 million of subordinated notes which qualify
as Tier 2 capital. The private offering was subscribed by the Company's
directors, officers and other accredited investors.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, and minority
interests, less goodwill. Supplementary capital includes the allowance for
loan losses (subject to certain limitations), other perpetual preferred stock,
certain other capital instruments, and term subordinated debt. The Company's
major capital components are shareholders' equity in core capital, and the
allowance for loan losses and subordinated debt in supplementary capital.
At December 31, 1996, the minimum risk-based capital requirements to be
considered adequately capitalized are 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by
average total assets (not risk-adjusted) for the preceding quarter. The
minimum leverage ratio is 3.0%, although banking organizations are expected to
exceed that amount by 1.0%, 2.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the Comptroller of the Currency and the FDIC have
adopted regulations setting forth a five-tier system for measuring the capital
adequacy of the financial institutions they supervise. The capital levels of
the Company at December 31, 1996 and the two highest levels recognized under
these regulations are set forth below.
<TABLE>
<CAPTION>
TIER 1 RISK-BASED TOTAL RISK BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
----------------- ---------------- --------
<S> <C> <C> <C>
Company.......................... 8.75% 10.54% 7.27%
Well-capitalized................. 6.0% 10.0% 5.0%
Adequately capitalized........... 4.0% 8.0% 4.0%
</TABLE>
At December 31, 1996, the Company's risk-based capital ratios were 8.75% for
Tier 1 risk-based capital and 10.54% for total risk-based capital, compared to
11.38% and 13.43% as of December 31, 1995, respectively. The Company's
leverage ratio was 7.27% at December 31, 1996, compared to 8.69% at December
31, 1995. These ratios all exceeded the well-capitalized guidelines shown
above.
In addition, at December 31, 1996, each of the Banks had levels of capital
which exceeded the well-capitalized guidelines. However, in order for CNB to
remain well-capitalized during 1997, additional capital will be required. For
additional information on the capital levels and capital ratios of the Company
and each of the Banks, see Note 14 of Notes to the Consolidated Financial
Statements.
The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1997, resulting in continued growth in
earning assets and deposits. On March 5, 1997, the Company filed a
registration statement with the Commission relating to the issuance of shares
of % Cumulative Trust Preferred Securities with an aggregate market value of
$20.0 million (the "Trust Preferred Offering"). If the
35
<PAGE>
Trust Preferred Offering is consummated, the Company believes that the
proceeds generated thereby will qualify as Tier 1 capital and will provide it
with adequate capital to support anticipated growth while allowing the Company
and each of the Banks to remain well-capitalized under applicable regulations.
However, should the Trust Preferred Offering not be consummated, it will be
necessary for the Company either to raise additional capital through the sale
of either debt or equity securities or restrict its growth in order for the
Company and each of the Banks to remain well-capitalized under applicable
regulations. Even if the Trust Preferred Offering is consummated, in the event
growth were to exceed expectations or an acquisition opportunity to expand
market share were to arise, it might still be necessary for the Company to
raise additional capital through the sale of either debt or equity securities.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. Interest rate risk
management focuses on the maturity structure of assets and liabilities and
their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an
acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons: one
day or immediate, two days to six months, seven to twelve months, one to three
years, three to five years, over five years and on a cumulative basis. The
differences are known as interest sensitivity gaps. The following table shows
interest sensitivity gaps for different intervals as of December 31, 1996.
<TABLE>
<CAPTION>
2 DAYS >1 YEAR >3 YRS TOTAL TOTAL
IMMEDIATE TO 6 MONTHS TO 3 TO 5 RATE NON-RATE
ONE DAY MONTHS 7-12 YRS YRS >5 YRS SENSITIVE SENSITIVE TOTAL
--------- -------- -------- ------- ------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks. -- -- -- -- -- -- -- $ 39,896 $ 39,896
Short term investments.. $ 14,000 -- -- -- -- -- $ 14,000 -- 14,000
Investment securities... 1,948 $ 14,012 $ 8,016 $23,021 $17,620 $ 39,452 104,069 1,451 105,520
Loans................... 347,800 10,798 8,385 15,048 10,636 54,326 446,993 3,831 450,824
Loan loss/unearned fees. -- -- -- -- -- -- -- (9,264) (9,264)
Other assets............ -- -- -- -- -- -- -- 21,068 21,068
-------- -------- -------- ------- ------- -------- -------- --------- --------
Total assets........... $363,748 $ 24,810 $ 16,401 $38,069 $28,256 $ 93,778 $565,082 $ 56,982 $622,044
======== ======== ======== ======= ======= ======== ======== ========= ========
LIABILITIES AND EQUITY:
Deposits
Demand................. -- -- -- -- -- -- -- $ 139,940 $139,940
NOW, MMDA, and savings. $312,284 -- -- -- -- -- $312,284 -- 312,284
Time deposits.......... -- $ 99,081 $ 6,938 $ 791 $ 176 $ 73 107,059 -- 107,059
Other borrowings and
subordinated debt...... 15,000 -- -- -- -- -- 15,000 -- 15,000
Other liabilities....... -- -- -- -- -- -- -- 3,079 3,079
Shareholders' equity.... -- -- -- -- -- -- -- 44,682 44,682
-------- -------- -------- ------- ------- -------- -------- --------- --------
Total liabilities and
equity................ $327,284 $ 99,081 $ 6,938 $ 791 $ 176 $ 73 $434,343 $ 187,701 $622,044
======== ======== ======== ======= ======= ======== ======== ========= ========
Gap..................... $ 36,464 $(74,271) $ 9,463 $37,278 $28,080 $ 93,705 $130,719 $(130,719) $ --
Cumulative Gap.......... $ 36,464 $(37,807) $(28,344) $ 8,934 $37,014 $130,719 $130,719 -- --
Cumulative Gap/total
assets................. 5.86% (6.08)% (4.56)% 1.44% 5.95% 21.01% 21.01% -- --
</TABLE>
The foregoing table demonstrates that the Company had a negative cumulative
one year gap of $28.3 million, or 4.56% of total assets, at December 31, 1996.
In theory, this would indicate that at December 31, 1996, $28.3 million more
in liabilities than assets would reprice if there was a change in interest
rates over the next 360 days. If interest rates were to increase, the negative
gap would tend to result in a lower net interest margin. However, changes in
the mix of earning assets or supporting liabilities can either increase or
decrease
36
<PAGE>
the net interest margin without affecting interest rate sensitivity. In
addition, the interest rate spread between an asset and its supporting
liability can vary significantly while the timing of repricing of both the
asset and its supporting liability can remain the same, thus impacting net
interest income. This characteristic is referred to as a basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected next
twelve month net interest income and net income has been evaluated through an
interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing
rate environments. As of December 31, 1996, the analysis indicates that the
Company's net interest income would increase a maximum of 8.0% if rates rose
200 basis points immediately and would decrease a maximum of 8.0% if rates
declined 200 basis points immediately. In addition, the results indicate that
notwithstanding the Company's negative gap position, which would indicate that
the net interest margin declines when rates rise, the Company's net interest
margin increases during rising rate periods due to the basis risk imbedded in
the Company's interest-bearing liabilities.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of the
Company's exposure to changes in interest rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." This statement establishes a new fair value based
accounting method for stock-based compensation plans and encourages (but does
not require) employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. Companies may continue to apply the accounting
provisions of APB 25 in determining net income; however, they must apply the
disclosure requirements of SFAS 123. The recognition provisions and disclosure
requirements of SFAS No. 123 were effective January 1, 1996. The Company has
not adopted the recognition provisions of SFAS No. 123 but has adopted the
disclosure requirements. For further information on SFAS No. 123, see Note 11
of the Notes to Consolidated Financial Statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair value at the date of
the transfer. Furthermore, this statement requires that debtors reclassify
financial assets pledged as collateral, and that secured parties recognize
those assets and their obligation to return them in certain circumstances in
which the secured party has taken control of those assets. In addition, the
statement requires that a liability be derecognized if and only if either (a)
the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Accordingly, a
liability is not considered extinguished by an in-substance defeasance. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Management does not believe that the application of
this statement will have a material impact on the Company's financial
statements.
37
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS 122 amends certain provisions of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair value, if it is
practicable to estimate those fair values. If it is not practicable to
estimate those fair values, the entire cost of the acquisition should be
allocated to the mortgage loans only. SFAS 122 is effective for years
occurring after December 31, 1995. Adoption of this pronouncement did not have
a material impact on the Company's financial statements.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. An impairment loss is measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
After an impairment is recognized, the reduced carrying amount of the asset
shall be accounted for as its new cost. SFAS No. 121 is effective for years
occurring after December 31, 1995. Adoption of this pronouncement did not have
a material impact on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements included at page 50 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
CHANGE IN ACCOUNTANT
Prior to the Merger, Cupertino's independent accountants were Coopers &
Lybrand, L.L.P. ("Coopers & Lybrand") and Mid-Peninsula's independent
accountants were KPMG Peat Marwick, LLP ("Peat Marwick"). On consummation of
the Merger, Mid-Peninsula changed its name to Greater Bay Bancorp, and on
December 17, 1996, Greater Bay changed its independent accountant by
terminating its engagement of Peat Marwick and selecting Coopers & Lybrand as
its independent accountant to audit its financial statements for the year
ended December 31, 1996. The decision to terminate Greater Bay's engagement of
Peat Marwick and select Coopers & Lybrand was unanimously recommended by
Greater Bay's Audit Committee and approved by Greater Bay's Board of
Directors. During the two most recent fiscal years of the Company and any
subsequent interim period preceding the aforesaid change, there were no
disagreements between the Company and Peat Marwick on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which if not resolved to the satisfaction of Peat Marwick would have
caused them to make reference to the subject matter of the disagreement in
their report. All descriptions contained herein of communications between the
Company and third parties and reports of third parties are qualified in their
entirety by the text of the communications and reports referred to herein.
Peat Marwick's report on the financial statements for 1994 and 1995
contained no adverse opinion or disclaimer of opinion nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles, except
their report dated January 22, 1996, relating to the consolidated balance
sheets of Mid-Peninsula Bancorp and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995, referenced other auditors. On October 7, 1994,
the Company acquired San Mateo County Bancorp on a pooling-of-interests basis.
Peat Marwick did not audit the consolidated financial statements of San Mateo
County Bancorp as of and for the year ended December 31, 1993. These
statements, which were included in the 1993 restated consolidated financial
statements, were audited by other auditors, whose report contained an
explanatory paragraph regarding the adoption SFAS No. 109, "Accounting for
Income Taxes," and SFAS No. 115, "Accounting for Certain Investments, Debt and
Equity Securities." Peat Marwick's report, insofar as it relates to the
amounts included for San Mateo County Bancorp, is based solely on the report
of other auditors.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information for the directors and certain
executive officers of Greater Bay and where indicated, CNB or MPB, as of
December 31, 1996.
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
---- ----------- ---
<S> <C> <C>
DIRECTORS:
John M. Gatto Co-Chairman of the Board 59
Duncan L. Matteson Co-Chairman of the Board of Greater Bay;
Chairman of the Board of MPB 62
Rex D. Lindsay Vice-Chairman of the Board 71
Edwin E. van Bronkhorst Vice-Chairman of the Board 73
David L. Kalkbrenner Director; Chief Executive Officer and President
of Greater Bay and MPB 57
James E. Jackson Director 62
Glen McLaughlin Director 62
Dick J. Randall Director 65
Donald H. Seiler Director 68
Warren R. Thoits Director 74
EXECUTIVE OFFICERS:
C. Donald Allen Chairman of the Board and Chief Executive
Officer of CNB 62
Murray B. Dey Executive Vice President and Chief Credit
Officer of MPB 54
David R. Hood Executive Vice President; Chief Lending Officer
of Greater Bay and CNB 52
Hall Palmer Executive Vice President and Senior Trust
Officer of Greater Bay Trust Company and CNB 56
Steven C. Smith Executive Vice President; Chief Operating
Officer and Chief Financial Officer of Greater
Bay; Executive Vice President and Chief
Operating Officer of CNB 45
</TABLE>
JOHN M. GATTO, Co-Chairman of Greater Bay since November 1996. He was a
director of Cupertino from 1984 to the date of the Merger and has served as
Chairman of the Board of CNB since 1984. Mr. Gatto has been the sole
proprietor of Maria Enterprises, a development consultant company, since
December 1993. From 1984 to 1993, Mr. Gatto was an architect for Cypress
Properties, a real estate development company.
DUNCAN L. MATTESON, Co-Chairman of the Board of Directors of Greater Bay
since November 1996. He served as Chairman of the Board of Greater Bay
(formerly Mid-Peninsula) from 1994 until the date of the Merger and has served
as Chairman of the Board of MPB since 1987. He is President of the Matteson
Companies, a diversified group of real estate investment and property
management corporations located in Menlo Park. He has been actively involved
in the real estate investment and securities industries in the Palo Alto/Menlo
Park Area since 1959. He is a member of the Executive Committee of the
Stanford Heart Council, and serves as a trustee of the Palo Alto Medical
Foundation. As an appointee of the Governor, Mr. Matteson is Vice President of
the board of directors of the Cow Palace. He is the Immediate Past-Chairman of
the National Multi-Housing Council, a group of the leading apartment owners
and managers throughout the United States.
39
<PAGE>
REX D. LINDSAY, Vice-Chairman of the Board of Directors of Greater Bay since
November 1996. He served as a director of Cupertino from 1984 to the date of
the Merger and has served as a director of CNB since 1984. For approximately
the past five years, Mr. Lindsay has been a rancher and a private investor.
EDWIN E. VAN BRONKHORST, Vice-Chairman of the Board of Directors of Greater
Bay (formerly Mid-Peninsula) since 1994 and a director of MPB since 1987. Mr.
van Bronkhorst retired from the Hewlett-Packard Company in 1984 and was, prior
to his retirement, Senior Vice President, Chief Financial Officer and
Treasurer of that company and served on its board of directors from 1962 to
1984. He currently serves as a member of the board of directors of the
California Water Service Company and Nellcor Puritan Bennett, a manufacturer
of medical equipment, and is a Trustee and Treasurer of the David & Lucille
Packard Foundation.
DAVID L. KALKBRENNER, President, Chief Executive Officer and a director of
Greater Bay and MPB. He has held such positions with Greater Bay (formerly
Mid-Peninsula) since 1994 and with MPB since 1987. He was employed by Crocker
National Bank from 1963 to 1986. From 1981 to 1986, he served as First Vice
President and Regional Manager of the Mid-Peninsula region, with
administrative offices located in Palo Alto. He was responsible for the
administration of 14 full-service branches from San Carlos to Sunnyvale, a
business banking center in Palo Alto and the private banking office, also
located in Palo Alto. From 1977 to 1981, he was Vice President and Manager of
the main office of Crocker National Bank in Palo Alto. He is a member of the
board of directors of the College of Notre Dame and is a former director of
the Palo Alto Chamber of Commerce and the Community Association for the
Retarded.
JAMES E. JACKSON, director of Greater Bay since November 1996. He served as
a director of Cupertino from 1984 to the date of the Merger and has served as
a director of CNB since 1984. Mr. Jackson has been an attorney-at-law at the
law firm Jackson & Abdalah, a Professional Corporation, since 1976.
GLEN MCLAUGHLIN, director of Greater Bay since November 1996. He served as a
director of Cupertino from 1984 to the date of the Merger and has served as a
director of CNB since 1984. Mr. McLaughlin has also served as the Chairman of
Venture Leasing Associates, an equipment leasing company, since December 1986.
DICK J. RANDALL, director of Greater Bay since November 1996. He served as a
director of Cupertino from 1984 to the date of the Merger and has served as a
director of CNB since 1984. Mr. Randall has been a private investor and
rancher since 1993. From 1962 until his retirement in 1993, Mr. Randall served
as the President of The William Lyon Co., a real estate developer and
construction company.
DONALD H. SEILER, director of Greater Bay (formerly Mid-Peninsula) since
1994 and of MPB since 1987. He is the founder and managing partner of Seiler &
Company, Certified Public Accountants, in Redwood City and San Francisco. He
has been a certified public accountant in San Francisco and the Peninsula area
since 1952. He is presently a director of Ross Stores, Inc., serves on the
audit committee of Stanford Health Services, is a past-president of the Jewish
Community Federation of San Francisco, the Peninsula and Marin and Sonoma
Counties. He is on the board of directors of the Peninsula Community
Foundation.
WARREN R. THOITS, director of Greater Bay (formerly Mid-Peninsula) since
1994 and of MPB since 1987. He is a partner with the Palo Alto law firm of
Thoits, Love, Hershberger & McLean. He is a native of Palo Alto and a graduate
of Stanford University and its School of Law. Mr. Thoits has been very active
in community and charitable organizations, having served as President of the
Palo Alto Chamber of Commerce, the Palo Alto Rotary Club and as Chairman of
the Palo Alto Area Chapter of the American Red Cross. He was formerly a member
of the board of directors of Northern California Savings and Loan Association
(now Great Western Bank).
40
<PAGE>
C. DONALD ALLEN, Chairman of the Board and Chief Executive Officer of CNB
since 1990. He served as President and Chief Executive Officer of Cupertino
from 1985 to the date of the Merger. Mr. Allen was a founding Director and
President of CNB.
MURRAY B. DEY, Executive Vice President and Chief Credit Officer of MPB
since 1987. From 1964 to 1986 he worked for Crocker National Bank. From 1975
to 1982, he was the Vice President and Assistant Manager of the main office of
Crocker National Bank in Palo Alto. He became the Manager of that office in
1982 and held that position until 1984. From 1984 to 1986 he was the Area
Market Manager in the Palo Alto/Menlo Park area. He currently serves as
President and Treasurer of the Home Equity Loan Program for Seniors, Inc., and
is a member of the Community Cabinet of the Lucille Packard Children's
Hospital at Stanford.
DAVID R. HOOD, Executive Vice President and Chief Lending Officer of Greater
Bay since November 1996. Since April 1995, he has served as Executive Vice
President and Senior Lending Officer of CNB. From April 1985 to March 1995, he
held positions of Vice President, Senior Vice President and Senior Loan
Officer, Executive Vice President and Senior Lending Officer, and President of
University Bank & Trust. From 1967 to 1985 Mr. Hood held various positions,
the most recent of which was Vice President and Manager of the San Mateo
Business Loan Center for Wells Fargo Bank, N.A.
HALL PALMER, Executive Vice President and Senior Trust Officer of the
Greater Bay Trust Company since November 1996. Mr. Palmer joined CNB in May
1995 as Executive Vice President and Senior Trust Officer. Prior to that time,
from May 1987 to May 1995, Mr. Palmer served as Executive Vice President and
Senior Trust Officer for University Bank & Trust. From 1984 to 1987, Mr.
Palmer was Senior Vice President and Executive Trust Officer for Key Bank of
Oregon. From 1968 to 1984, Mr. Palmer was Manager and Trust Officer for Wells
Fargo Bank, N.A.
STEVEN C. SMITH, Executive Vice President, Chief Operating Officer and Chief
Financial Officer of Greater Bay since November 1996 and Executive Vice
President and Chief Operating Officer of CNB since 1995. He is a certified
public accountant who joined Cupertino and CNB in December 1993 as Senior Vice
President and Chief Financial Officer, and in 1995 was named Executive Vice
President and Chief Operating Officer of Cupertino and CNB. From July 1993 to
December 1993, Mr. Smith served as Executive Vice President and Chief
Financial Officer of Commercial Pacific Bank. From 1992 to July 1993, Mr.
Smith served as Executive Vice President and Chief Financial Officer of First
Charter Bank. From 1984 to 1991, Mr. Smith served as Senior Vice President of
Finance and Treasurer of Fidelity Federal Bank, a federal savings bank.
41
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and five other executive officers
of Greater Bay or the Banks as of December 31, 1996 whose total salary and
bonus for the year ended December 31, 1996 exceeded $100,000. In all cases,
payment was for services in all capacities to Greater Bay (and its
predecessors, Mid-Peninsula and Cupertino) and the Banks during the fiscal
years ended December 31, 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM AWARDS
----------------------- --------------------------
SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(2) COMPENSATION(3) SARS(4) COMPENSATION(5)
POSITION YEAR ($) ($) ($) (#) ($)
- ------------------ ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 1996 182,083 124,000 8,400 20,000 71,054
President and CEO of 1995 150,000 97,000 8,400 15,000 45,033
Greater Bay and MPB 1994 142,110 74,000 8,400 1,062 13,142
C. Donald Allen......... 1996 185,858 7,500 -- 3,816 69,129
Chairman and CEO 1995 161,177 7,500 -- -- 14,730
of CNB 1994 150,000 -- -- -- 13,020
Steven C. Smith......... 1996 139,020 70,860 6,000 9,131 28,501
Executive Vice
President, 1995 127,250 48,000 6,000 8,968 7,133
COO and CFO of Greater
Bay; 1994 103,416 30,000 6,000 8,968 830
EVP and COO of CNB
David Hood.............. 1996 124,120 62,490 6,000 7,131 40,222
Executive Vice
President and 1995 85,462 48,000 6,000 13,453 2,153
Chief Lending Officer
of 1994 -- -- -- -- --
Greater Bay and CNB
Murray B. Dey........... 1996 124,425 80,000 6,000 6,000 34,959
Executive Vice
President and 1995 120,000 67,000 6,000 -- 23,891
Chief Credit Officer of
MPB 1994 115,000 42,000 6,000 1,062 10,089
Hall Palmer............. 1996 122,600 62,490 6,000 4,631 33,343
Executive Vice
President and 1995 80,000 48,000 6,000 13,453 2,580
Senior Trust Officer of
Greater 1994 -- -- -- -- --
Bay Trust Company and
CNB
</TABLE>
- --------
(1) Annual salary includes cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers under the 401(k) Plan.
(2) Amounts indicated as bonus payments were earned for performance during
1996, 1995, and 1994 but paid in the first quarters of 1997, 1996, and
1995, respectively.
(3) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1996, 1995, or 1994.
(4) Under the Greater Bay Bancorp 1996 Stock Option Plan (the "1996 Option
Plan"), options may be granted to directors and key, full-time salaried
officers and employees of Greater Bay, MPB and CNB. Options granted under
the 1996 Option Plan are either incentive options or non-statutory
options. Options granted under the 1996 Option Plan become exercisable in
accordance with a vesting schedule established at the time of grant.
Vesting may not extend beyond ten years from the date of grant. Options
granted under the
42
<PAGE>
1996 Option Plan are adjusted to protect against dilution in the event of
certain changes in Greater Bay's capitalization, including stock splits and
stock dividends. All options granted to the named executive officers were
incentive stock options and have an exercise price equal to the fair market
value of Greater Bay's Common Stock on the date of grant. For David L.
Kalkbrenner and Murray B. Dey, the amounts shown have been adjusted to give
effect to a five percent stock dividend in December 1993, and the conversion
ratio pertaining to the merger transaction whereby WestCal merged with and
into MPB and MPB became a wholly owned subsidiary of the Company, which
transaction was consummated on October 7, 1994. For C. Donald Allen, Steven
C. Smith, David R. Hood and Hall Palmer, the amounts shown give effect to
the conversion ratio pertaining to the Merger between Greater Bay and
Cupertino which became effective on November 27, 1996.
(5) Amounts shown for David L. Kalkbrenner include $2,600 in director fees,
$3,612 in term life insurance premiums and $6,930 in 401(k) plan matching
contributions in 1994; $2,400 in directors' fees, $3,903 in term life
insurance premiums, $31,800 accrued under his Salary Continuation Agreement
and $6,930 in 401(k) plan matching contributions in 1995; and $2,400 in
directors' fees, $11,000 in term life insurance premiums, $50,529 accrued
under his Salary Continuation Agreement and $7,125 in 401(k) plan matching
contributions in 1996.
Amounts shown for C. Donald Allen include $8,400 in directors' fees and
$4,620 in 401(k) plan matching contributions in 1994; $8,150 in directors'
fees, $4,650 in 401(k) plan matching contributions and $1,930 to fund
retirement benefits in 1995; and $9,734 in directors' fees, $4,750 in
401(k) plan matching contributions and $54,639 to fund retirement benefits
in 1996.
Amounts shown for Steven C. Smith include $830 in 401(k) plan matching
contributions in 1994; $4,620 in 401(k) plan matching contributions and
$2,513 to fund retirement benefits in 1995; and $4,750 in 401(k) plan
matching contributions and $23,751 to fund retirement benefits in 1996.
Amounts shown for David R. Hood, who joined the Company in April 1995,
include $2,153 in payments to fund his retirement benefits in 1995; $4,750
in 401(k) plan matching contributions and $33,472 to fund his retirement
benefits in 1996.
Amounts shown for Murray B. Dey include $3,159 in term life insurance
premiums and $6,930 in 401(k) plan matching contributions in 1994; $2,060
in term life insurance premiums, $14,901 accrued under his Salary
Continuation Agreement and $6,930 in 401(k) plan matching contributions in
1995; and $4,155 in term life insurance premiums, $23,679 accrued under his
Salary Continuation Agreement and $7,125 in 401(k) plan matching
contributions in 1996.
Amounts shown for Hall Palmer, who joined the Company in May 1995, include
$2,580 to fund his retirement benefits in 1995; $4,750 in 401(k) plan
matching contributions and $28,593 to fund his retirement benefits in 1996.
43
<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides the specified information concerning grants of
options to purchase Greater Bay's Common Stock made during the year ended
December 31, 1996 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS IN FISCAL 1996 FOR OPTION TERM(1)
- -------------------------------------------------------------------- -----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE(3) EXPIRATION 5% 10%
NAME GRANTED(2) FISCAL YEAR ($/SH) DATE ($) ($)
- ---- ---------- ------------ -------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 10,000 16.75 01/11/06 105,340 266,952
10,000 21.75 12/17/06 136,785 346,639
------
20,000 16.12
C. Donald Allen......... 816 15.94 05/16/02 8,180 20,730
3,000 21.75 12/17/06 41,035 103,992
------
3,816 3.08
Steven C. Smith......... 1,631 15.94 05/16/02 16,350 41,434
7,500 21.75 12/17/06 102,588 259,979
------
9,131 7.36
David Hood.............. 1,631 15.94 05/16/02 16,350 41,434
5,500 21.75 12/17/06 75,232 190,651
------
7,131 5.75
Murray B. Dey........... 3,000 16.75 01/17/06 31,602 80,086
3,000 21.75 12/17/06 41,035 103,992
------
6,000 4.84
Hall Palmer............. 1,631 15.94 05/16/02 16,350 41,434
3,000 21.25 12/17/06 41,036 103,992
------
4,631 3.74
</TABLE>
- --------
(1) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on Securities and Exchange Commission (the
"Commission") rules. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions and the optionholders' continued employment through the vesting
period. The amounts reflected in this table may not necessarily be
achieved. One share of stock purchased in 1996 at $15.94 would yield
profits of $10.02 per share at 5% appreciation over ten years, or $25.40
per share at 10% appreciation over the same period. One share of stock
purchased in 1996 at $21.75 would yield profits of $13.68 per share at 5%
appreciation over ten years, or $34.66 per share at 10% appreciation over
the same period. One share of stock purchased in 1996 at $16.75 would
yield profits of $10.53 per share at 5% appreciation over ten years, or
$26.70 per share at 10% appreciation over the same period.
(2) Generally, options granted under the 1996 Option Plan vest at the rate of
25% of the options granted for each full year of the optionee's continuous
employment with the Company and are exercisable to the extent vested. See
also "--Employment Contracts and Termination of Employment and Change in
Control Arrangements" herein.
(3) All options listed were granted at the estimated fair market value on the
date of grant.
44
<PAGE>
The following table provides the specified information concerning exercises
of options to purchase Greater Bay's Common Stock in the fiscal year ended
December 31, 1996, and unexercised options held as of December 31, 1996, by
the persons named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 12/31/96(#) 12/31/96($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 4,917 27,068 12,307 32,894 161,550 255,302
C. Donald Allen......... -- -- 22,291 3,000 375,135 7,875
Steven C. Smith......... -- -- 20,282 10,489 274,109 61,728
David R. Hood........... -- -- 15,083 5,500 210,358 14,438
Murray B. Dey........... 1,203 6,514 6,550 7,366 89,916 47,554
Hall Palmer............. -- -- 15,083 3,000 210,358 7,875
</TABLE>
- --------
(1) Based on the closing price of Greater Bay's Common Stock on December 31,
1996, the last trading day in 1996, which was $24.375.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective March 3, 1992, the Company entered into a two-year employment
agreement with David L. Kalkbrenner which provides for automatic one-year
extensions until the agreement is terminated as described below. The
agreement, as amended, provides for, among other things: (a) a base salary of
$135,000 per year, as adjusted at the discretion of the board of directors;
(b) a discretionary annual bonus based upon the pre-tax net profits of the
Company, (c) payment to Mr. Kalkbrenner of his base salary (reduced by the
amount received by him from state disability insurance or workers'
compensation or other similar insurance through policies provided by the
Company) for a period of six months if he becomes disabled so that he is
unable to perform his duties; (d) four weeks annual vacation leave; (e) a
$500,000 life insurance policy; (f) an automobile allowance; and (g)
reimbursement for ordinary and necessary expenses incurred by Mr. Kalkbrenner
in connection with his employment. The agreement may be terminated with or
without cause, but if the agreement is terminated due to the occurrence of
circumstances that make it impossible or impractical for the Company to
conduct or continue its business, the loss by the Company of its legal
capacity to contract, the Company's breach of the terms of the agreement, or
in the Company's discretion by giving not less than 30 days' prior written
notice of termination, Mr. Kalkbrenner will be entitled to receive severance
compensation equal to 24 months of Mr. Kalkbrenner's then existing base
salary. The agreement further provides that in the event of a "change in
control" as defined therein and within a period of two years following
consummation of such change in control: (a) Mr. Kalkbrenner's employment is
terminated; or (b) any adverse change occurs in the nature and scope of Mr.
Kalkbrenner's position, responsibilities, duties, salary, benefits or location
of employment; or (c) any event occurs which reasonably constitutes a
demotion, significant diminution or constructive termination of
Mr. Kalkbrenner's employment, Mr. Kalkbrenner will be entitled to receive
severance compensation in an amount equal to two and one-half times his
average annual compensation for the five years immediately preceding the
change in control (or for such shorter time as Mr. Kalkbrenner was employed by
the Company).
The Company has entered into an Executive Salary Continuation Agreement with
C. Donald Allen effective as of August 1, 1993. The agreement provides for an
annual benefit of up to $100,000 to be paid to Mr. Allen or his designated
beneficiary over a period of one hundred and eighty (180) months. The benefit
is effective upon: (i) Mr. Allen's attainment of sixty-five (65) years of age
or his death or disability prior to such time if he were actively employed by
the Company at the time; (ii) termination of his employment by the Company
without "cause" (as defined in the agreement); (iii) termination or
constructive termination of his employment by the Company after the occurrence
of a "change of control" in the Company or the Bank as defined in the
agreement.
45
<PAGE>
Although this agreement is intended to provide Mr. Allen with an additional
incentive to remain in the employ of the Company the agreement states it shall
not be deemed to constitute a contract of employment between Mr. Allen and the
Bank nor shall any provision of this agreement restrict the right of Mr. Allen
to terminate his employment. The agreement shall have no impact or effect upon
any separate written employment agreement which Mr. Allen may have with the
Company.
The Company has entered into an Employment Severance and Retirement Benefits
Agreements with Steven C. Smith effective as of September 1, 1994, David R.
Hood, effective as of April 14, 1994 and Hall Palmer effective as of May 1,
1995. Each employment agreement sets the officer's beginning annual salary,
subject to annual cost of living adjustments, with the initial salary payable
to Mr. Smith being set at $135,000 and the initial salary payable to Mr. Hood
and Mr. Palmer being set at $120,000. Each of these employment agreements
entitles the officer to severance benefits equal to 12 months' salary in the
event that such officer's employment is terminated for any reasons other than
death, disability, retirement or certain acts of misconduct, or in the event
that such officer resigns within one year after a change in control of the
Company upon a reduction in responsibilities or compensation or certain other
events deemed to be unfavorable to the officer. In addition, the agreements
entitle each officer to certain retirement benefits. See "--Retirement
Benefits" herein.
1996 STOCK OPTION PLAN
Greater Bay's Board of Directors has adopted the 1996 Option Plan for the
purpose of offering selected employees, directors and consultants an
opportunity to acquire a proprietary interest in the success of Greater Bay,
or to increase such interest, by purchasing shares of Common Stock. The 1996
Option Plan provides both for the grant of nonstatutory options as well as
incentive stock options intended to qualify under Section 422 of the Code.
Options granted under the 1996 Option Plan contain provision pursuant to
which, in the event of a Change in Control (as defined herein) of Greater Bay,
all unexercised options will become exercisable in full prior to such event,
unless the surviving corporation substitutes a substantially equivalent
option. The 1996 Option Plan provides that a "Change of Control" will occur in
the event of (i) a change in the composition of the Board of Directors, as a
result of which fewer than half of the incumbent directors are directors who
either (a) had been directors of Greater Bay (including prior service as a
director of either CNB or MPB) 24 months prior to such change or (b) were
elected, or nominated for election, to the Board of Directors with the
affirmative votes of at least a majority of the directors who had been
directors of Greater Bay at the effective time of the Merger or 24 months
prior to such change (whichever is later) and who were still in office at the
time of the election or nomination or (ii) any "person" (as such term is
defined in Sections 13(d) and 14(d) of the Exchange Act) who is or become the
beneficial owner, directly or indirectly, of securities of Greater Bay
representing 50% or more of the combined voting power of Greater Bay's then
outstanding securities.
RETIREMENT BENEFITS
Pursuant to the employment agreements between the Company and Messrs. Smith,
Hood and Palmer, each such officer or his spouse (should she survive him) is
entitled to retirement benefits based upon the proceeds of a split-dollar life
insurance policy maintained by the Company for each officer's benefit. Each
officer may begin receiving benefits upon reaching "retirement age" (as
defined in each agreement) or upon termination of employment, whichever occurs
later. Benefits are payable in the form of draws against the annual increase
in the cash surrender value of the officer's insurance policy from the time
benefits commence, up to a maximum annual draw of $55,000 for Mr. Hood,
$44,000 for Mr. Palmer and $60,000 for Mr. Smith (or such lesser amount as
shall have vested, as described below) with the increase in value in excess of
such amount becoming the property of the Company. The right to make such draws
continues during the lifetime of the officer and his surviving spouse, but in
no case longer than 40 years. The right to this retirement benefit vests at
1/84 of such amount monthly following the effective date of such employment
agreement, provided that vesting is subject to acceleration upon the
occurrence of certain events following a Change in Control, as such term is
defined in each employment agreement. See "--Employment Contracts and
Termination of Employment and Change in Control Arrangements" herein.
46
<PAGE>
COMPENSATION OF DIRECTORS
Directors of MPB received $200 for each board meeting attended during 1996.
Non-employee directors of MPB received $150 for each committee meeting
attended in 1996. Non-employee directors of MPB's Loan Committee received $500
per month retainer as well as $150 for each meeting attended during 1996.
Total compensation for MPB directors in 1996 was $63,590.
For 1996, the Chairman and Vice Chairman of the Board of CNB received annual
retainers of $15,000 and $12,500, respectively. All other directors received
an annual retainer of $10,000. In addition, the Chairman and Vice Chairman of
the Directors' Loan Committee received annual retainers of $4,500, and other
members received annual retainers of $4,000. The Chairman of the Audit
Committee received an annual retainer of $2,000, and Audit Committee members
each received an annual retainer of $1,500. The Trust Committee Chairman
received an annual retainer of $2,000 and Trust Committee members each
received $1,500. The Compensation Committee members each received an annual
retainer of $1,000. Total compensation for CNB directors in 1996 was $158,374.
For 1997, the Co-Chairmen of the Board will receive annual retainers of
$14,000. All other non-officer directors will receive annual retainers of
$9,000. Loan committee members will receive retainers of $6,000, Trust
Oversight Committee members will receive retainers of $3,000, and Audit
Committee and Investment / ALCO Committee members will receive retainers of
$1,000. Members of the Boards of Directors of CNB and MPB will receive
retainers of $1,800 each. The estimated total compensation for the Boards of
Directors in 1997 is $189,500.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee acts as the Executive Compensation Committee of
Greater Bay. The members of the Executive Committee are Messrs. Gatto,
Matteson, Lindsay and van Bronkhorst. None of these persons serves or has
served as an officer or employee of the Company or the Banks. Mr. Matteson has
an interest in a building leased by MPB. See "Item 13. Certain Relationships
and Related Transactions."
During 1996, the Executive Committee of Mid-Peninsula served as the
Compensation Committee for Mid-Peninsula and MNB. The members of the Committee
are Messrs. Kalkbrenner, Matteson, Seiler, Thoits and van Bronkhorst. No
person who served as a member of the Executive Committee during 1996 has ever
been an officer or employee of Mid-Peninsula or MPB, except Mr. Kalkbrenner.
During 1996, the Executive Committee of Cupertino served as the Compensation
Committee of Cupertino and CNB. The members of the Committee were Messrs.
Gatto, Lindsay, McLaughlin and Randall. No person who served as a member of
the Executive Committee of Cupertino during 1996 has ever been an officer or
employee of Cupertino or CNB.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a request class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the Commission. Executive offices, directors and greater than
ten-percent shareholders are required by Commission regulation to furnish to
the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company,
or written representation that no Form 5 was required, the Company believes
that during the fiscal year ended December 31, 1996 all executive officers,
directors and greater than ten-percent beneficial owners complied with all
Section 16(a) filing requirements applicable to them, except as follows:
Following the consummation of the Merger, a Form 4 reporting the change in
ownership as a result of the consummation of the Merger was filed late for
each of the former directors of Cupertino and executive officers of Cupertino
who became directors and executive officers of Greater Bay after the Merger.
These individuals included Messrs. Allen, Gatto, Hood, Jackson, Lindsay,
McLaughlin, Palmer, Randall and Smith.
47
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of December 31, 1996
concerning beneficial ownership of Greater Bay Common Stock for the directors
and the executive officers named in the Summary Compensation Table and as a
group. Unless otherwise indicated, each director and executive officer listed
below possesses sole voting power and sole investment power. All of the shares
shown in the following table are owned both of record and beneficially except
as indicated in the notes to the table. Greater Bay has only one class of
stock outstanding, Greater Bay Common Stock. There are no current arrangements
known to Greater Bay that may result in a change in control of Greater Bay. As
of December 31, 1996, no person known to Greater Bay owned more than five
percent (5%) of the outstanding shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
---------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER(1) SHARES OF CLASS
------------------- ---------- ----------
<S> <C> <C>
C. Donald Allen(3)........................................ 55,482 1.70
Murray B. Dey(4).......................................... 21,575 0.67
John M. Gatto(5).......................................... 29,354 0.90
David Hood(6)............................................. 21,272 0.65
James E. Jackson(7)....................................... 49,104 1.51
David L. Kalkbrenner(8)................................... 34,264 1.05
Rex D. Lindsay(9)......................................... 51,141 1.57
Duncan L. Matteson(10).................................... 41,750 1.28
Glen McLaughlin(11)....................................... 45,365 1.39
Hall Palmer(12)........................................... 22,179 0.68
Dick J. Randall(13)....................................... 107,194 3.30
Donald H. Seiler(14)...................................... 26,580 0.82
Steven C. Smith(15)....................................... 30,886 0.95
Warren R. Thoits(16)...................................... 29,065 0.90
Edwin E. van Bronkhorst(17)............................... 25,330 0.78
All Directors and Executive Officers as a Group
(15 Persons)(18)......................................... 590,541 17.37
</TABLE>
- --------
(1) The address for beneficial owners, all of whom are directors or executive
officers of Greater Bay, is the address of Greater Bay, 2860 West Bayshore
Road, Palo Alto, California 94303.
(2) Includes shares subject to stock options exercisable within 60 days of
December 31, 1996.
(3) Includes 414 shares held by Mr. Allen's wife, 3,579 shares held in an IRA
for Mr. Allen, 598 shares held in a 401(k) plan for Mr. Allen and 22,291
shares issuable upon the exercise of options which are exercisable within
60 days of December 31, 1996.
(4) Includes 14,563 shares held jointly with Mr. Dey's spouse as trustees of
the Murray B. Dey and Wendy H. Dey Trust dated April 23, 1982 and 4,889
shares subject to stock options exercisable within 60 days of December 31,
1996.
(5) Includes 12,662 shares issuable upon the exercise of options which are
exercisable within 60 days of December 31, 1996.
(6) Includes 5,526 shares held in Mr. Hood's IRA, 276 shares held jointly by
Mr. Hood and his spouse, 387 shares in his 401(k) plan and 15,083 shares
issuable upon the exercise of options which are exercisable within 60 days
of December 31, 1996.
(7) Includes 32,109 shares held jointly by James E. Jackson and his spouse,
1,466 shares held in an IRA for the benefit of Mr. Jackson's spouse, 7,013
shares held in an IRA for Mr. Jackson, 1,385 shares held in a 401(k) plan
for Mr. Jackson, and 7,131 shares issuable upon the exercise of options
which are exercisable within 60 days of December 31, 1996.
48
<PAGE>
(8) Includes 9,047 shares held in Mr. Kalkbrenner's IRA account and 15,254
shares subject to stock options exercisable within 60 days of December
31, 1996.
(9) Includes 36,927 shares held by the Rex D. and Leanor L. Lindsay Family
Trust, 1,906 shares held by Mr. Lindsay as custodian for his minor
grandchildren and 12,123 shares issuable upon the exercise of options
which are exercisable within 60 days of December 31, 1996.
(10) Includes 30,000 shares jointly with Mr. Matteson's spouse as trustees of
the Matteson Family Trust, 9,000 shares held by the Matteson Realty
Services, Inc. Defined Benefit Employees' Retirement Trust and 2,750
shares subject to stock options exercisable within 60 days of December
31, 1996.
(11) Includes 4,861 shares in Mr. McLaughlin's Keogh account, and 16,418
shares issuable upon the exercise of options which are exercisable within
60 days of December 31, 1996.
(12) Includes 1,548 shares held in Mr. Palmer's IRA and 15,083 shares subject
to stock options exercisable within 60 days of December 31, 1996.
(13) Includes 98,334 shares held by the Dick J. and Carolyn L. Randall Trust
and 8,675 shares issuable upon the exercise of options which are
exercisable within 60 days of December 31, 1996.
(14) Includes 24,580 shares held jointly with Mr. Seiler's spouse as trustees
of the Seiler Family Trust and 2,000 shares subject to stock options
exercisable within 60 days of December 31, 1996.
(15) Includes 2,121 shares held in Mr. Smith's 401(k) plan, 8,743 shares held
jointly by Mr. Smith and his spouse and 20,022 shares issuable upon the
exercise of options which are exercisable within 60 days of December 31,
1996.
(16) Includes 9,832 shares held by Mr. Thoits as Trustee of the Warren R.
Thoits Trust dated December 30, 1983, 5,836 shares held by Thoits
Brothers, Inc., 10,647 shares for which Mr. Thoits is the record holding
trustee and 2,750 shares subject to stock options exercisable within 60
days of December 31, 1996.
(17) Includes 22,580 shares held jointly with Mr. van Bronkhorst's spouse as
Trustees of the E. E. van Bronkhorst Trust dated July 12, 1977 and 2,750
shares subject to stock options exercisable within 60 days of December
31, 1996.
(18) Includes 159,881 options exercisable within 60 days of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company, through the Banks, has had, and expects in the future to have,
banking transactions in the ordinary course of its business with the Company's
directors and officers and their associates, including transactions with
corporations of which such persons are directors, officers or controlling
shareholders, on substantially the same terms (including interest rates and
collateral) as those prevailing for comparable transactions with others.
Management believes that such transactions comprising loans did not involve
more than the normal risk of collectibility or present other unfavorable
features. Loans to executive officers of the Company are subject to
limitations as to amount and purposes prescribed in part by the Federal
Reserve Act, as amended.
MPB leases its offices at 420 Cowper Street, Palo Alto, California 94301
from MPB Associates, a tenant-in-common arrangement in which three directors
of Greater Bay, Messrs. Matteson, Seiler and Thoits, and four other directors
of MPB hold an approximate 51% interest. The acquisition of MPB's leased
premises by MPB Associates in 1990 did not result in a change in the terms of
MPB's lease.
The lease, which originally expired in May 1993, has been extended through
January 2000. MPB pays an annual rental of $560,000 for the entire leased
space. Additionally, MPB pays real property taxes, utilities, and building
insurance, to the extent they exceed, on an annual basis, $1.40 per rentable
square foot, $1.60 per rentable square foot, and $0.17 per rentable square
foot, respectively. The rent will be adjusted every twelve months beginning
June 1, 1997 in accordance with the change in the immediately preceding year
over 1992 in the Consumer Price Index for All Urban Consumers, San
Francisco/Oakland metropolitan Area, All-Items (1967 = 100) as published by
the U.S. Department of Labor, Bureau of Labor Statistics. The lease also
contains a provision granting MPB a right of first refusal to purchase the
building during the term of the lease upon the same terms and conditions that
the landlord is willing to accept from a third party.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included in this report at the page numbers
indicated.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants..................................... 51
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 52
Consolidated Statements of Operations for the Years ended December 31,
1996, 1995 and 1994.................................................. 53
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1996, 1995 and 1994..................................... 54
Consolidated Statements of Cash Flows for the Years ended December 31,
1996, 1995 and 1994.................................................. 55
Notes to Consolidated Financial Statements............................ 56
</TABLE>
1. FINANCIAL STATEMENTS AND SCHEDULES
2. All financial statement schedules are omitted because of the absence
of the conditions under which they are required to be provided or
because the required information is included in the financial
statements listed above and/or related notes.
3. EXHIBITS
See Item 14(c) below.
(b) REPORTS ON FORM 8-K
On November 12, 1996, the Company filed a Report on Form 8-K reporting
under Item 5 concerning "Other Events."
On December 27, 1996, the Company filed a Report on Form 8-K reporting
under Item 4 concerning "Changes in Registrant's Certifying
Accountant."
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.
(d) ADDITIONAL FINANCIAL STATEMENTS
Not applicable.
50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Greater Bay Bancorp:
We have audited the accompanying consolidated balance sheets of Greater Bay
Bancorp (formerly Mid-Peninsula Bancorp) and subsidiaries (the Company) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P
San Francisco, California
February 27, 1997
51
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995*
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 39,896 $ 29,511
Federal funds sold......................................... 14,000 28,600
-------- --------
Cash and cash equivalents................................ 53,896 58,111
Investment securities...................................... 105,520 116,869
Total loans, net........................................... 441,560 284,579
Premises and equipment, net................................ 4,688 2,912
Interest receivable and other assets....................... 16,380 15,363
-------- --------
Total assets........................................... $622,044 $477,834
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits............................................. $559,283 $431,789
Other borrowings........................................... 12,000 --
Subordinated debt.......................................... 3,000 3,000
Other liabilities.......................................... 3,079 2,933
-------- --------
Total liabilities...................................... 577,362 437,722
Commitments (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued
Common stock, no par value: 6,000,000 shares authorized;
shares outstanding: 3,238,887 in 1996 and 3,046,320 in
1995...................................................... 34,884 33,105
Unrealized gain (loss) on available-for-sale securities,
net of taxes.............................................. 71 (621)
Retained earnings.......................................... 9,727 7,628
-------- --------
Total shareholders' equity............................. 44,682 40,112
-------- --------
Total liabilities and shareholders' equity............. $622,044 $477,834
======== ========
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino
National Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
52
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1996 1995* 1994*
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans........... $36,278 $28,397 $22,112
Interest on investment
securities:
Taxable................... 6,433 6,204 4,248
Tax-exempt................ 690 497 411
------- ------- -------
Total interest on
investment securities.. 7,123 6,701 4,659
Other interest income....... 1,636 2,135 1,030
------- ------- -------
Total interest income..... 45,037 37,233 27,801
------- ------- -------
INTEREST EXPENSE:
Interest on deposits........ 15,732 13,048 8,130
Interest on short-term
borrowings................. 126 769 382
Interest on subordinated
debt....................... 355 75 --
------- ------- -------
Total interest expense.... 16,213 13,892 8,512
------- ------- -------
Net interest income..... 28,824 23,341 19,289
Provision for loan losses... 2,036 956 1,823
------- ------- -------
Net interest income after
provision for loan losses.. 26,788 22,385 17,466
------- ------- -------
OTHER INCOME:
Service charges and other
fees....................... 1,848 1,206 1,290
Trust fees.................. 1,426 710 593
Gain on sale of SBA loans... 519 366 685
Gain on sale of mortgage
loans...................... -- 137 993
Gains (losses) on
investments, net........... (263) (113) (266)
------- ------- -------
Total other income........ 3,530 2,306 3,295
------- ------- -------
OPERATING EXPENSES:
Compensation and benefits... 11,773 10,146 8,505
Occupancy and equipment..... 3,401 2,679 2,266
Merger and related non-
recurring costs............ 2,791 -- 608
Other....................... 5,923 6,861 4,852
------- ------- -------
Total operating expenses.. 23,888 19,686 16,231
------- ------- -------
Income before income tax
expense................ 6,430 5,005 4,530
Income tax expense........ 2,927 1,971 1,966
------- ------- -------
Net Income.................. $ 3,503 $ 3,034 $ 2,564
======= ======= =======
Net income per common and
common equivalent share.... $ 1.04 $ 0.96 $ 0.85
======= ======= =======
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino
National Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
53
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994
----------------------------------------------------
COMMON STOCK EARNINGS TOTAL
----------------- ------------------- SHAREHOLDERS'
SHARES AMOUNT UNREALIZED RETAINED EQUITY
--------- ------- ---------- -------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances as of December 31,
1993:
Mid-Peninsula Bancorp
prior to pooling........ 1,455,665 $14,216 $ (48) $ 3,672 $17,840
Shares issued to
Cupertino National
Bancorp shareholders.... 1,142,797 13,582 -- -- 13,582
Cupertino National
Bancorp retained
earnings prior
to pooling.............. -- -- -- 2,637 2,637
--------- ------- ------- ------- -------
Balance, December 31,
1993, as restated to
reflect pooling....... 2,598,462 27,798 (48) 6,309 34,059
Stock options exercised.. 128,614 1,114 -- -- 1,114
Stock issued in Employee
Stock Purchase Plan..... 6,716 69 -- -- 69
Adoption of SFAS No.
115--unrealized loss on
available-for-sale
securities.............. -- -- (1,272) -- (1,272)
Two 5% stock dividends--
fractional shares paid
in cash................. 58,914 705 -- (708) (3)
Cash dividend $0.18 per
share................... -- -- (491) (491)
Net Income............... -- -- -- 2,564 2,564
--------- ------- ------- ------- -------
Balance, December 31,
1994*................. 2,792,706 29,686 (1,320) 7,674 36,040
Stock options exercised,
including related tax
benefit................. 104,454 1,109 -- -- 1,109
Stock issued in Employee
Stock Purchase Plan..... 8,537 80 -- -- 80
401K Employee Stock
Purchase................ 6,731 95 -- -- 95
Cash dividends of $0.30
per share............... -- -- -- (942) (942)
10% stock dividend--
fractional shares paid
in cash................. 133,892 2,135 -- (2,138) (3)
SFAS No. 115 change in
unrealized loss on
available-for-sale
securities.............. -- 699 -- 699
Net Income............... -- -- -- 3,034 3,034
--------- ------- ------- ------- -------
Balance, December 31,
1995*................. 3,046,320 33,105 (621) 7,628 $40,112
Stock options exercised,
including related tax
benefit................. 176,657 1,555 -- -- 1,555
Stock issued in Employee
Stock Purchase Plan..... 10,632 137 -- -- 137
401K Employee Stock
Purchase................ 5,278 87 -- -- 87
Cash dividends of $0.44
per share............... -- -- -- (1,404) (1,404)
SFAS No. 115--change in
unrealized loss on
available-for-sale
securities.............. -- 692 -- 692
Net Income............... -- -- -- 3,503 3,503
--------- ------- ------- ------- -------
Balance, December 31,
1996.................. 3,238,887 $34,884 $ 71 $ 9,727 $44,682
========= ======= ======= ======= =======
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino
National Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
54
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995* 1994*
--------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows--Operating Activities:
Net Income................................... $ 3,503 $ 3,034 $ 2,564
Reconciliation of net income to net cash from
operations:
Provision for loan losses.................. 2,036 956 1,823
Depreciation and leasehold amortization.... 1,125 899 777
Deferred income taxes...................... (1,145) 181 75
Accrued interest receivables and other
assets.................................... (128) (1,234) (1,828)
Accrued interest payable and other
liabilities............................... 146 909 807
Deferred loan fees and discounts, net...... 653 27 (105)
Proceeds from sale of loans held for sale.. -- 16,364 125,342
Origination of loans for resale............ -- (10,981) (123,100)
--------- -------- ---------
Operating cash flows, net...................... 6,190 10,155 6,355
--------- -------- ---------
Cash Flows--Investing Activities:
Maturities of investment securities and other
short-term investments:
Held-to-maturity........................... 24,956 29,130 13,048
Available-for-sale......................... 28,737 10,441 1,510
Purchase of investment securities and other
short-term investments
Held-to-maturity........................... (26,439) (54,561) (36,504)
Available-for-sale......................... (39,389) (8,388) (2,000)
Proceeds from sale of available-for-sale
securities.................................. 26,635 -- 6,734
Loans, net................................... (161,845) (48,195) (14,556)
Investment in other real estate owned........ -- (476) (485)
Sale of other real estate owned.............. 217 1,054 1,733
Premises and equipment....................... (2,906) (1,388) (1,000)
Purchase of insurance policies............... (240) (6,004) --
Other, net................................... -- -- 84
--------- -------- ---------
Cash flows, net................................ (150,274) (78,387) (31,436)
--------- -------- ---------
Cash Flows--Financing Activities:
Net change in deposits....................... 127,494 85,495 22,994
Net change in short-term borrowings.......... 12,000 (17,256) 17,256
Subordinated debt issued..................... -- 3,000 --
Proceeds from the sale of stock.............. 1,779 1,127 1,028
Fractional shares paid in cash............... -- (3) (3)
Cash dividends............................... (1,404) (942) (491)
--------- -------- ---------
Financing cash flows, net...................... 139,869 71,421 40,784
--------- -------- ---------
Net increase in cash and cash equivalents...... (4,215) 3,189 15,703
Cash and cash equivalents at beginning of year. 58,111 54,922 39,219
--------- -------- ---------
Cash and cash equivalents at end of year....... $ 53,896 $ 58,111 $ 54,922
--------- -------- ---------
Cash flows--supplemental disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings.. $ 16,228 $ 13,827 $ 8,278
--------- -------- ---------
Income taxes............................... $ 3,970 $ 2,105 $ 1,878
--------- -------- ---------
Non-cash transactions:
Additions to other real estate owned......... $ 152 $ 130 $ 1,047
--------- -------- ---------
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino
National Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
55
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Greater Bay Bancorp ("GBB" or the "Company") is a California corporation and
bank holding company that was incorporated on November 14, 1984 as San Mateo
County Bancorp. The name was changed to Mid-Peninsula Bancorp on October 7,
1994 as a result of the merger between Mid-Peninsula Bank and San Mateo County
Bancorp and its wholly owned subsidiary, WestCal National Bank. The name was
further changed to Greater Bay Bancorp on November 27, 1996 as a result of the
merger between Mid-Peninsula Bancorp and Cupertino National Bancorp (see Note
2). Upon consummation of the merger with Cupertino National Bancorp, GBB
became a multi-bank holding company of two wholly owned bank subsidiaries,
Mid-Peninsula Bank ("MPB") and Cupertino National Bank & Trust ("CNB"),
collectively the "Banks." MPB commenced operations in October 1987 and is a
state chartered bank regulated by the Federal Reserve Bank (FRB) and the
California State Banking Department. CNB commenced operations in May 1985 and
is a national banking association regulated by the Office of the Comptroller
of Currency (OCC).
The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers and property managers,
business executives, professionals and other individuals. The Company operates
through seven regional offices in Cupertino, Palo Alto, San Mateo, San Carlos
and San Jose, California.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of GBB and its
wholly-owned subsidiaries, CNB and MPB. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior years' consolidated financial statements to conform to the
1996 presentation. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to prevailing
practices within the banking industry.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods. CNB and MPB are required by the Federal
Reserve System to maintain non-interest earning cash reserves against certain
of their deposit accounts. At December 31, 1996, the required combined
reserves totaled approximately $2.9 million.
INVESTMENT SECURITIES
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," which was adopted by
the Company in 1994, requires that investment securities be classified into
three portfolios, and be accounted for as follows: 1) debt and equity
securities for which the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at
56
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and 3) debt and equity securities not classified
as either held-to-maturity or trading securities are classified as available-
for-sale securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary, results in a charge
to earnings and the corresponding establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized
gains and losses for securities classified as available-for-sale and held-to-
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
The required investment of 3% of capital stock and surplus in Federal
Reserve Bank stock, for both MPB and CNB, is recorded at cost.
LOANS
Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.
Interest income is accrued on the outstanding loan balances using the simple
interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest
is not expected. At the time a loan is placed on nonaccrual status, any
interest income previously accrued but not collected is reversed. Interest
accruals are resumed on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest.
The Company charges loan origination and commitment fees. Net loan
origination fees and costs are deferred and amortized to interest income over
the life of the loan, using the effective interest method. Loan commitment
fees are amortized to interest income over the commitment period.
SALES AND SERVICING OF SMALL BUSINESS ADMINISTRATION ("SBA") LOANS
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of each loan to an investor and retains the
unguaranteed portion and servicing rights in its own portfolio. Funding for
the SBA programs depend on annual appropriations by the U.S. Congress.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such
loans between the portion sold, the portion retained and a value assigned to
the right to service the loan. The difference between the adjusted carrying
value of the portion retained and the face amount of the portion retained is
amortized to interest income over the life of the related loan using a method
which approximates the interest method. The value assigned to the right to
service is also amortized over the estimated life of the loan.
ALLOWANCE FOR LOAN LOSSES
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, on January 1, 1995. Under these
standards, a loan is considered impaired, based on current
57
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Under these standards, any
allowance on impaired loans is generally based on one of three methods. It
requires that impaired loans be measured at either, (1) the present value of
expected cash flows at the loan's effective interest rate, (2) the loan's
observable market price, or (3) the fair market value of the collateral of the
loan. In general, these statements are not applicable to large groups of
smaller-balance loans that are collectively evaluated for impairment such as
credit cards, residential mortgage and/or consumer installment loans. Adoption
of SFAS No. 114 and No. 118 did not have a material effect on the financial
statements of the Company in 1995. Income recognition on impaired loans
conforms to the method the Company uses for income recognition on nonaccrual
loans.
The allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and unidentified losses in the loan
portfolio. The allowance is based upon a number of factors, including
prevailing and anticipated economic trends, industry experience, industry and
geographic concentrations, estimated collateral values, management's
assessment of credit risk inherent in the portfolio, delinquency trends,
historical loss experience, specific problem loans and other relevant factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of properties acquired through
foreclosure and is stated at the lower of cost or fair value less estimated
costs to sell. Development and improvement costs relating to the property are
capitalized. Estimated losses that result from the ongoing periodic valuation
of these properties are charged to current earnings with a provision for
losses on foreclosed property in the period in which they are identified. The
resulting allowance for OREO losses is decreased when the property is sold.
Operating expenses of such properties, net of related income, are included in
other expenses. Gains and losses on disposition of OREO are included in other
income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the shorter of the lease terms or estimated useful lives of the
assets, which are generally 3 to 10 years.
INCOME TAXES
Deferred income taxes reflect the estimated future tax effects of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
PER SHARE DATA
Net income per common and common equivalent share is based on the weighted
average number of shares of common stock outstanding during the year plus the
effect of dilutive stock options. All years presented include the effect of
stock dividends declared in 1995 and 1994. The weighted average common and
common equivalent shares outstanding for 1996, 1995 and 1994 were 3,359,700,
3,144,550 and 3,001,211, respectively.
58
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fully diluted earnings per share were approximately equal to primary
earnings per share in each of the years in the three-year period ended
December 31, 1996.
Weighted average shares outstanding and all per share amounts included in
the consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 1994 merger with
San Mateo County Bancorp at a 1.0617 conversion ratio, and the 1996 merger
with Cupertino National Bancorp at a 0.81522 conversion ratio.
NOTE 2--MERGERS
On November 27, 1996, the Company consummated a merger between Mid-Peninsula
Bancorp and Cupertino National Bancorp. As discussed in Note 1, concurrently
with the merger the name of the holding company was changed to Greater Bay
Bancorp. Following the terms of the merger agreement, the Company issued
approximately 1,586,000 shares of its common stock in exchange for the
outstanding common stock of Cupertino National Bancorp at an exchange ratio of
0.81522 of the Company's common stock for each share of Cupertino National
Bancorp's common stock. The merger has been accounted for as a pooling of
interests business combination and, accordingly, the consolidated financial
statements and the financial data for the periods prior to the merger have
been restated to include the accounts and results of operations of Cupertino
National Bancorp.
On October 7, 1994, San Mateo County Bancorp's wholly owned subsidiary,
WestCal National Bank, was merged with and into Mid-Peninsula Bank, and San
Mateo County Bancorp concurrently changed its name to Mid-Peninsula Bancorp.
The merger was accounted for as a pooling of interests. All periods have been
restated to reflect the results of the combination. The accompanying
consolidated financial statements reflect the issuance of the Company's common
stock in exchange for all of MPB's common stock outstanding as of October 7,
1994, based upon the exchange ratio of 1.0617 shares of the Company's common
stock for each share of MPB's common stock.
In both mergers, certain reclassifications have been made to conform to the
Company's presentation. The results of operations previously reported by the
separate enterprises for the period before the merger was consummated and that
are included in the current combined amounts presented in the accompanying
consolidated financial statements are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 (UNAUDITED) 1995 1994
----------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Interest Income:
Mid-Peninsula Bancorp................... $ 8,878 $10,402 $ 8,207
Cupertino National Bancorp.............. 11,487 12,939 11,082
------- ------- -------
Combined.............................. $20,365 $23,341 $19,289
------- ------- -------
Provision for Loan Losses:
Mid-Peninsula Bancorp................... $ 427 $ 275 $ 203
Cupertino National Bancorp.............. 864 681 1,620
------- ------- -------
Combined.............................. $ 1,291 $ 956 $ 1,823
------- ------- -------
Net Income:
Mid-Peninsula Bancorp................... $ 2,373 $ 2,721 $ 1,201
Cupertino National Bancorp.............. 1,548 313 1,363
------- ------- -------
Combined.............................. $ 3,921 $ 3,034 $ 2,564
------- ------- -------
</TABLE>
59
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the composition of the combined operations of
San Mateo County Bancorp and its wholly-owned subsidiary, WestCal National
Bank, and MPB for the nine months ended September 30, 1994 prior to the
consummation of the merger on October 7, 1994.
<TABLE>
<CAPTION>
NET INTEREST PROVISION FOR NET
INCOME LOAN LOSSES INCOME
------------ ------------- ------
(DOLLARS IN THOUSANDS) UNAUDITED
<S> <C> <C> <C>
Mid-Peninsula Bank........................ $4,657 $235 $ 867
San Mateo County Bancorp.................. 1,293 (32) 217
------ ---- ------
$5,950 $203 $1,084
------ ---- ------
</TABLE>
There were no significant transactions between Mid-Peninsula Bancorp and
Cupertino National Bancorp, and between San Mateo County Bancorp and Mid-
Peninsula Bank prior to the mergers. All intercompany transactions have been
eliminated.
NOTE 3--INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities is
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations............. $ 19,841 $ 52 $ (6) $ 19,887
U.S. Agency obligations:
Mortgage-backed obligations......... 3,604 5 (53) 3,556
Fixed and variable rate notes....... 10,568 34 (13) 10,589
Mutual funds.......................... 2,000 (52) 1,948
Tax exempt securities................. 7,758 154 (11) 7,901
Corporate securities.................. 3,216 7 -- 3,223
-------- ---- ----- --------
Total securities available-for-sale. 46,987 252 (135) 47,104
-------- ---- ----- --------
Held-to-maturity securities:
U.S. Treasury obligations............. 1,005 3 1,008
U.S. Agency obligations:
Mortgage-backed obligations......... 7,086 87 (9) 7,164
Fixed and variable rate notes....... 38,390 78 (100) 38,368
Other mortgage-backed obligations..... 3,959 54 -- 4,013
Tax exempt securities................. 6,525 219 (3) 6,741
Federal Reserve Bank stock............ 673 -- -- 673
Federal Home Loan Bank stock.......... 778 -- -- 778
-------- ---- ----- --------
Total securities held-to-maturity... 58,416 441 (112) 58,745
-------- ---- ----- --------
Total investment securities......... $105,403 $693 $(247) $105,849
======== ==== ===== ========
</TABLE>
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
60
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations............. $ 7,778 $ 62 $ (3) $ 7,837
U.S. Agency obligations:
Mortgage-backed obligations......... 4,131 22 (58) 4,095
Fixed and variable rate notes....... 19,431 54 (18) 19,467
Mutual funds.......................... 16,458 (929) 15,529
Tax exempt securities................. 11,662 462 (20) 12,104
Corporate securities.................. 2,990 20 3,010
-------- ------ ------- --------
Total securities available-for-sale. 62,450 620 (1,028) 62,042
-------- ------ ------- --------
Held-to-maturity securities:
U.S. Treasury obligations............. 5,987 24 -- 6,011
U.S. Agency obligations:
Mortgage-backed obligations......... 8,190 159 -- 8,349
Fixed and variable rate notes....... 35,056 145 (19) 35,182
Other mortgage-backed obligations..... 4,195 102 -- 4,297
Federal Reserve Bank stock............ 660 -- -- 660
Federal Home Loan Bank stock.......... 739 -- -- 739
-------- ------ ------- --------
Total securities held-to-maturity... 54,827 430 (19) 55,238
-------- ------ ------- --------
Total investment securities......... $117,277 $1,050 $(1,047) $117,280
======== ====== ======= ========
</TABLE>
In November 1995, the FASB issued a special report, "A Guide to
Implementation of Statement No. 115, on Accounting for Certain Investments in
Debt and Equity Securities--Questions and Answers" (the "Special Report"). The
Special Report allowed companies to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications at fair value. Reclassifications from this one-time
reassessment will not call into question the intent of an enterprise to hold
other debt securities to maturity in the future, provided that
reclassification was performed by December 31, 1995. The Company adopted the
reclassification provision of the Special Report prior to December 31, 1995
and transferred $36.4 million of held-to-maturity securities into the
available-for-sale category. The unrealized pretax gain upon transfer was
$512,000 as of December 31, 1995.
61
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity at December 31, 1996.
<TABLE>
<CAPTION>
1998 2002
THROUGH THROUGH 2007 AND
1997 2001 2007 THEREAFTER TOTAL
------- ------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations....... $15,003 $ 4,838 -- -- $ 19,841
U.S. Agency obligations:
Mortgage-backed
obligations(1)............... 599 3,005 -- -- 3,604
Fixed and variable rate
notes(2)..................... 1,500 9,068 -- -- 10,568
Mutual Funds(3)................. 2,000 -- -- -- 2,000
Tax exempt securities........... 453 1,567 3,623 2,115 7,758
Corporate securities............ 1,178 2,038 -- -- 3,216
------- ------- ------ ------ --------
Total securities available-
for-sale..................... 20,733 20,516 3,623 2,115 46,987
------- ------- ------ ------ --------
Market value.................... 20,708 20,524 3,672 2,200 47,104
------- ------- ------ ------ --------
Held-to-maturity securities:
U.S. Treasury obligations....... 503 502 -- -- 1,005
U.S. Agency obligations:
Mortgage-backed
obligations(1)............... -- 69 2,595 4,422 7,086
Fixed and variable rate
notes(2)..................... 3,000 17,999 15,391 2,000 38,390
Other mortgage-backed
obligations(1)................. -- -- -- 3,959 3,959
Tax exempt securities........... -- 1,040 256 5,229 6,525
Federal Reserve Bank stock...... -- -- -- 673 673
Federal Home Loan Bank stock.... -- -- -- 778 778
------- ------- ------ ------ --------
Total securities held-to-
maturity..................... 3,503 19,610 18,242 17,061 58,416
------- ------- ------ ------ --------
Market value.................... 3,493 19,549 18,369 17,334 58,745
------- ------- ------ ------ --------
Total investment securities..... 24,236 40,126 21,865 19,176 105,403
------- ------- ------ ------ --------
Total market value.............. 24,201 40,073 22,041 19,534 105,849
------- ------- ------ ------ --------
Weighted average yield-total
portfolio(4)................... 5.32% 6.19% 7.04% 6.77% 6.29%
------- ------- ------ ------ --------
</TABLE>
- --------
(1) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations may be
called, without penalty, at the discretion of the issuer. This may cause
the actual maturities to differ significantly from the contractual
maturity dates.
(3) Mutual funds with no stated maturity total $2.0 million ($1.9 million
market value).
(4) Yields on tax exempt securities have been computed on a fully tax-
equivalent basis.
Investment securities with a carrying value of $23.5 million and $16.5
million as of December 31, 1996 and 1995, respectively, were pledged to secure
deposits and for other purposes as required by law or contract.
The Company does not hold any investments of any one issuer where the
aggregate with that issuer exceeds 10% of stockholders' equity. Investments in
the Federal Reserve Bank and the Federal Home Loan Bank are required in order
to maintain membership and support activity levels.
62
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 1996, 1995, and 1994 are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------- ----- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Proceeds from sale of available-for-sale
securities........................................ $26,635 -- $6,734
Available-for-sale securities--losses(1)........... $ (729) $(113) $ (266)
</TABLE>
- --------
(1) Includes $466,000 of charges in 1996 to conform accounting practices,
which is included in merger and related non-recurring costs.
NOTE 4--LOANS
The following is a summary of loans by category as of December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Commercial............................................... $257,042 $181,617
Real estate construction and land........................ 78,278 32,672
Commercial real estate term and other.................... 72,802 47,322
Consumer and other....................................... 42,702 28,666
-------- --------
Total loans, gross....................................... 450,824 290,277
Deferred loan fees and discounts....................... (1,952) (1,299)
-------- --------
Total loans, net of deferred fees........................ 448,872 288,978
Allowance for loan losses.............................. (7,312) (4,399)
-------- --------
Total loans, net....................................... $441,560 $284,579
======== ========
</TABLE>
The following summarizes the activity in the allowance for loan losses for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1................................ $4,399 $ 4,344 $ 3,657
Provision for loan losses(1).................... 2,836 956 1,823
Loans charged off............................... (299) (1,081) (1,247)
Recoveries...................................... 376 180 111
------ ------- -------
Balance, December 31.............................. $7,312 $ 4,399 $ 4,344
====== ======= =======
</TABLE>
- --------
(1) Includes $800,000 of charges in 1996 to conform accounting practices for
the Banks' reserve methodologies which is included in merger and related
costs.
63
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth non-performing loans as of December 31, 1996,
1995 and 1994. Non-performing loans are defined as loans which are on non-
accrual status, loans which have been restructured, and loans which are 90
days past due but are still accruing interest. Interest income foregone on
non-performing loans outstanding at year-end totaled $215,000, $245,000 and
$275,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest income recognized on the non-performing loans approximated $95,000,
$63,000 and $50,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. There were no restructured loans at December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans...................................... $1,875 $2,513 $3,668
Accruing loans past due 90 days or more................ 1,237 830 1,371
------ ------ ------
Total non-performing loans............................. $3,112 $3,343 $5,039
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118,
was approximately $1.9 million and $2.5 million, respectively, with
corresponding valuation allowances of $1.0 million and $0.5 million,
respectively. For the years ended December 31, 1996 and 1995, the average
recorded investment in impaired loans was approximately $2.2 million and $2.6
million, respectively. The Company did not recognize interest income on
impaired loans during the twelve months ended December 31, 1996 and 1995.
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 1996, other real estate owned consisted of one property
acquired through foreclosure with a carrying value of $152,000 and is included
in interest receivable and other assets in the accompanying consolidated
balance sheets. There was no allowance for estimated losses. The Company had
no other real estate owned at December 31, 1995.
The following summarizes other real estate operations, which are included in
operating expenses, for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Income (loss) from:
Real estate operations, net.............................. $(35) $(45) $ (70)
Provision for estimated losses........................... -- (17) (42)
---- ---- -----
Net loss from other real estate operations............... $(35) $(62) $(112)
==== ==== =====
</TABLE>
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Leasehold improvements..................................... $ 2,774 $ 1,613
Furniture and equipment.................................... 6,510 4,988
Automobiles................................................ 134 157
------- -------
Total.................................................... 9,418 6,758
------- -------
Accumulated depreciation and amortization.................. (4,730) (3,846)
------- -------
Premises and equipment, net.............................. $ 4,688 $ 2,912
======= =======
</TABLE>
64
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization amounted to $1,125,000, $899,000 and $777,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and have
been included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
NOTE 7--DEPOSITS
Deposits as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Demand, noninterest-bearing............................... $139,940 $ 96,063
NOW....................................................... 26,936 22,084
Money market demand accounts.............................. 271,749 211,654
Savings................................................... 13,599 12,486
Other time certificates................................... 38,889 25,716
Time certificates, $100 and over.......................... 68,170 63,786
-------- --------
Total Deposits.......................................... $559,283 $431,789
======== ========
</TABLE>
NOTE 8--OTHER BORROWINGS
Short-term borrowings are detailed as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased
Balance at December 31.......................... $12,000 $ -- $ 7,000
Average balance................................. 669 1,120 1,800
Maximum amount outstanding at any month-end..... 12,000 5,600 12,000
Average interest rate:
During the year............................... 5.42% 5.96% 4.18%
At December 31................................ 6.63% -- 6.50%
Securities sold under agreements to repurchase
Balance at December 31.......................... $ -- $ -- $10,256
Average balance................................. 1,556 11,486 5,908
Maximum amount outstanding at any month-end..... 14,994 26,994 24,153
Average interest rate:
During the year............................... 5.74% 6.12% 5.13%
At December 31................................ -- -- 6.29%
</TABLE>
Federal funds purchased generally mature the following day after the
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale.
In 1995, the Company consummated a private offering of $3.0 million of 11.5%
subordinated notes. The notes, which will mature on September 15, 2005, were
offered to members of the Board of Directors, bank officers and other
accredited investors within the definition of Rule 501 under the Securities
Act of 1933, as amended. The debentures are redeemable by the Company any time
after September 30, 1998 at a premium ranging from 0% to 5%. The notes qualify
as Tier 2 capital of the Company.
65
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 3,308 $1,227 $1,425
State............................................. 764 563 466
------- ------ ------
Total current expense (benefit)................... 4,072 1,790 1,891
------- ------ ------
Deferred:
Federal........................................... (966) 221 71
State............................................. (179) (40) 4
------- ------ ------
Total deferred expense (benefit).................. (1,145) 181 75
------- ------ ------
Total expense....................................... $ 2,927 $1,971 $1,966
------- ------ ------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of the Company's deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1996 1995
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loan loss reserves........................................... $2,145 $1,278
Deferred compensation........................................ 102 92
State income taxes........................................... 653 339
Unrealized gains............................................. (35) (214)
Other........................................................ (118) (72)
------ ------
Net deferred tax asset....................................... $2,747 $1,423
------ ------
</TABLE>
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1996, 1995
and 1994:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Statutory federal tax rate................................ 35.0% 35.0% 35.0%
California franchise tax expense, net of federal income
tax benefit.............................................. 7.6 6.9 5.7
Tax exempt income......................................... (4.9) (3.2) (3.3)
Non-deductible merger and restructuring costs............. 3.9 0.0 3.8
Other, net................................................ 3.9 0.7 (4.8)
---- ---- ----
Effective income tax rate................................. 45.5% 39.4% 36.4%
---- ---- ----
</TABLE>
66
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--OPERATING EXPENSES
Other operating expenses were comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Professional and legal fees............................ $1,270 $2,968 $1,176
FDIC insurance and regulatory assessments.............. 102 551 858
Other real estate, net................................. 35 62 112
Supplies and postage................................... 592 356 269
Telephone.............................................. 232 213 198
Director fees.......................................... 227 207 236
Insurance.............................................. 105 205 194
Correspondent bank charges............................. 43 158 118
Marketing.............................................. 859 289 118
Client services........................................ 411 337 376
Other.................................................. 2,047 1,515 1,197
------ ------ ------
Total.................................................. $5,923 $6,861 $4,852
====== ====== ======
</TABLE>
Merger and other related non-recurring costs incurred in connection with the
merger consummated in November 1996 (see Note 2) totaling $2.8 million include
$1.1 million of professional fees related to the transaction, $1.2 million of
charges to conform accounting practices of the two merged entities, with the
balance related to severance and compensation costs.
NOTE 11--EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Effective November 27, 1996, the Company's shareholders approved the Greater
Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan") and authorized an
increase in the number of shares available for issuance from 457,037 to
967,890 shares. Under the terms of the merger, all stock option plans of
Cupertino National Bancorp and Mid-Peninsula Bancorp were terminated at the
time of the merger and all outstanding options from these plans were assumed
by the Bancorp Plan. Outstanding options from the Mid-Peninsula Bancorp plan
of 216,326 and outstanding options from the Cupertino National Bancorp plan of
251,073 (converted at a ratio of 0.81522) were assumed by the Bancorp Plan.
Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive stock options or
nonqualified stock options as defined under current tax laws. The exercise
price of each option must equal the market price of the Company's stock on the
date of grant. The term of an option may not exceed 10 years.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 "Accounting for Stock-Based Compensation". Under the provisions
of SFAS No. 123, the Company is encouraged, but not required, to measure
compensation costs related to its employee stock compensation plans under the
fair market value method. If the Company elects not to recognize compensation
expense under this method, it is required to disclose the pro forma net income
and earnings per share effects based on the SFAS No. 123 fair value
methodology. The Company implemented the requirements of SFAS No. 123 in 1996
and has elected to adopt the disclosure provisions of this statement.
67
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company had one stock option plan, which is
described above. The Company applies Accounting Pronouncements Bulletin (APB)
Opinion No. 25 and related interpretations in accounting for its Plan.
Accordingly, no compensation cost has been recognized for its stock option
plan. Had compensation for the Company's stock option plan been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Income:
As reported....................................... $3,503 $3,034
Pro Forma......................................... $3,351 $2,979
Primary earnings per share
As reported....................................... $1.04 $0.96
Pro Forma......................................... $1.00 $0.94
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1996 and 1995, respectively; dividend yield
of 2.0% for all years; expected volatility of 19.3% for both years; risk free
rates of 6.0% and 6.9%. No adjustments have been made for forfeitures. The
actual value, if any, that the option holder will realize from these options
will depend solely on the increase in the stock price over the option price
when the options are exercised.
A summary of the Company's fixed stock option plan as of December 31, 1996,
1995, and 1994 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 558 $10.78 542 $ 9.55 463 $ 8.04
Granted................. 183 19.27 175 12.65 252 13.03
Exercised............... (184) 7.78 (124) 8.49 (133) 8.14
Forfeited............... (8) 8.58 (35) 10.30 (40) 8.98
---- ------ ---- ------ ---- ------
Outstanding at end of
year................... 549 $13.14 558 $10.78 542 $ 9.55
---- ------ ---- ------ ---- ------
Options exercisable at
year-end............... 284 $12.90 365 $ 9.30 378 $ 9.94
---- ------ ---- ------ ---- ------
Weighted average fair
value of options
granted during the
year................... $ 4.20 $ 2.48 NA
------ ------ ------
</TABLE>
All stock option information has been adjusted for stock dividends in 1995 and
1994.
401(K) SAVINGS PLAN
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employee contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of
deferral of an individual's total compensation). The matching contribution
vests ratably over the first four years of employment. The Company contributed
$282,000 to the plan in 1996, $212,000 in 1995, and $153,200 in 1994.
68
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan, as amended,
under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 133,934 shares. Under the plan,
the purchase price is 85% of the lower of the fair market value at the
beginning or end of each three month offering period. During 1996, employees
purchased 10,633 shares of common stock for an aggregate purchase price of
$136,500 compared to the purchase of 8,536 shares of common stock for an
aggregate purchase price of $80,400 in 1995. There are 82,318 shares remaining
in the plan available for purchase by employees at December 31, 1996.
SALARY COMPENSATION PLAN
During 1993 and 1995, the Company entered into salary continuation
agreements with certain executive officers. Under these agreements, the
Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to 40 years after the employee's death,
disability or retirement, annual benefits ranging from $36,000 to $85,000. The
estimated present value of future benefits to be paid is being accrued over
the vesting period of the participants. Expenses accrued for this plan for the
years ended December 31, 1996, 1995 and 1994 totaled $310,000, $173,000, and
$72,000, respectively. Depending on the agreement, the Company and the
employees are the beneficiaries of life insurance policies that have been
purchased as a method of financing the benefits under the agreements. At
December 31, 1996 and 1995, the Company's cash surrender value of these
policies was $8.9 million and $8.3 million, respectively, and is included in
other assets.
NOTE 12--RELATED PARTY TRANSACTIONS
Loans made to executive officers, directors and their affiliates, are made
subject to approval by the Directors' Loan Committee and the Board of
Directors. An analysis of total loans to related parties for the years ended
December 31, 1996 and 1995 is shown as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance, January 1......................................... $ 9,873 $ 7,788
Additions.................................................. 1,346 4,694
Repayments................................................. (3,671) (2,609)
------- -------
Balance, December 31....................................... $ 7,548 $ 9,873
======= =======
Undisbursed commitments, at year end....................... $ 1,866 $ 432
======= =======
</TABLE>
NOTE 13--COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
The Company leases the facilities from which it operates all of its
activities. The main headquarters of MPB in Palo Alto is leased from a group
of investors, which includes three of the Company's directors. Future minimum
lease commitments under all non-cancelable operating leases as of December 31,
1996 are below:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1997................................................ $ 2,146
1998................................................ 2,154
1999................................................ 2,068
2000................................................ 1,482
2001................................................ 1,457
Thereafter.......................................... 2,505
-------
Total............................................... $11,812
-------
</TABLE>
69
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1996, 1995,
and 1994 was $309,000, $398,000, and $447,000, respectively. Gross rental
expense for the years ended December 31, 1996, 1995, and 1994 was $1.69
million, $1.43 million, and $1.26 million, respectively.
OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. At December 31, 1996, commitments to fund loans and outstanding
standby letters of credit were approximately $202.8 million and $16.9 million,
respectively. The Company's exposure to credit loss is limited to amounts
funded or drawn; however, at December 31, 1996, no losses are anticipated as a
result of these commitments.
Loan commitments which have fixed expiration dates and require the payment
of a fee are typically contingent upon the borrower meeting certain financial
and other covenants. Approximately $60.0 million of these commitments relate
to real estate construction and land loans and are expected to fund within the
next 12 months. However, the remainder relate primarily to revolving lines of
credit or other commercial loans, and many of these commitments are expected
to expire without being drawn upon, therefore the total commitments do not
necessarily represent future cash requirements. Cupertino National Bank and
Mid-Peninsula Bank evaluate each potential borrower and the necessary
collateral on an individual basis. Collateral varies, but may include real
property, bank deposits, debt or equity securities, or business assets.
Stand-by letters of credit are conditional commitments written by the Banks
to guarantee the performance of a client to a third party. These guarantees
are issued primarily relating to purchases of inventory by the Banks'
commercial clients, and are typically short-term in nature. Credit risk is
similar to that involved in extending loan commitments to clients, and the
Banks accordingly use evaluation and collateral requirements similar to those
for loan commitments.
In the ordinary course of business there are various assertions, claims and
legal proceedings pending against the Company. Management is of the opinion
that the ultimate resolution of these proceedings will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
In July 1995, the Company settled a lawsuit for $1.1 million (net of tax)
which alleged that the Company did not perform its fiduciary duties and, as a
result, the plaintiff incurred losses on real estate investments that were
purchased. The Company believes that insurance coverage for this settlement is
available to the Company under various insurance policies and the Company is
currently in the process of pursuing recovery under these policies. However,
due to the uncertainty associated with the recovery, the Company reflected the
settlement expense in 1995 earnings.
NOTE 14--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
70
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (as defined in
the regulations) and are set forth in the table below. At December 31, 1996,
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from all of the
Company's and the Banks' regulators categorized the Company and the Banks as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Company and the Banks must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table. There are no conditions or events since that
determination that management believes have changed the institution's
category. The Company and the Banks' actual 1996 and 1995 capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $53,638 10.54% 1$40,720 18.00% N/A
Mid-Peninsula Bank........... 25,415 11.07 1 18,359 18.00 1$22,949 110.00%
Cupertino National Bank and
Trust....................... 28,022 10.03 1 22,346 18.00 1 27,932 110.00
Tier 1 Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $44,530 8.75% 1$20,360 14.00% N/A
Mid-Peninsula Bank........... 22,810 9.94 1 9,179 14.00 1$13,769 1 6.00%
Cupertino National Bank and
Trust....................... 21,515 7.70 1 11,173 14.00 1 16,759 1 6.00
Tier 1 Capital (To Average
Assets):
GREATER BAY BANCORP.......... $44,530 7.27% 1$24,496 14.00% N/A
Mid-Peninsula Bank........... 22,810 8.23 1 8,312 13.00 1$13,853 1 5.00%
Cupertino National Bank and
Trust....................... 21,515 6.42 1 13,412 14.00 1 16,765 1 5.00
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $47,369 13.43% 1$28,208 18.00% N/A
Mid-Peninsula Bank........... 22,280 14.90 1 11,959 18.00 1$14,949 110.00%
Cupertino National Bank and
Trust....................... 23,088 11.35 1 16,267 18.00 1 20,334 110.00
Tier 1 Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $40,112 11.38% 1$14,104 14.00% N/A
Mid-Peninsula Bank........... 20,564 13.76 1 5,979 14.00 1$ 8,969 1 6.00%
Cupertino National Bank and
Trust....................... 17,546 8.62 1 8,134 14.00 1 12,201 1 6.00
Tier 1 Capital (To Average
Assets):
GREATER BAY BANCORP.......... $40,112 8.69% 1$18,464 14.00% N/A
Mid-Peninsula Bank........... 20,564 9.31 1 6,628 13.00 1$11,046 1 5.00%
Cupertino National Bank and
Trust....................... 17,546 7.32 1 9,591 14.00 1 11,989 1 5.00
</TABLE>
71
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
One of the principal sources of cash for the Company is dividends from its
subsidiary Banks. Total dividends which may be declared by the Banks without
receiving prior approval from regulatory authorities are limited to the lesser
of the Banks' retained earnings or the net income of the Banks for the latest
three fiscal years, less dividends previously declared during that period.
Under these restrictions and considering minimum regulatory capital
requirements, the Banks are able to declare combined dividends of up to
approximately $6.3 million as of December 31, 1996.
The Banks are subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, the Banks are prohibited from lending to the Company unless the
loans are secured by specified types of collateral. Such secured loans and
other advances from the Banks are limited to 10% of the Banks' shareholders'
equity, or a maximum of $4.4 million at December 31, 1996. No such advances
were made during 1996 or exist as of December 31, 1996.
NOTE 16--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only)
follow:
PARENT COMPANY ONLY--BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents.................................. $ 567 $ 1,848
Investment in subsidiaries................................. 44,475 38,214
Subordinated debentures purchased by subsidiary............ 3,000 3,000
Other assets............................................... 69 209
------- -------
Total assets................................................ $48,111 $43,271
======= =======
Liabilities and shareholders' equity:
Subordinated debt.......................................... 3,000 3,000
Other liabilities.......................................... 429 159
------- -------
Total liabilities........................................... 3,429 3,159
Shareholders' equity
Common stock............................................... 34,884 33,105
Unrealized gain (loss)..................................... 71 (621)
Retained earnings.......................................... 9,727 7,628
------- -------
Total shareholders' equity.................................. 44,682 40,112
------- -------
Total liabilities and shareholders' equity.................. $48,111 $43,271
======= =======
</TABLE>
72
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PARENT COMPANY ONLY--STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income.................................... $ 531 $ 61 $ 24
Other income....................................... 142 631 949
------ ------ ------
Total............................................... 673 692 973
------ ------ ------
Expenses:
Occupancy and equipment............................ 460 441 410
Less rentals received from the Banks............... (460) (441) (409)
Other expenses...................................... 1,436 75 689
------ ------ ------
Total............................................... 1,436 75 690
------ ------ ------
Income before taxes and equity in undistributed net
income of subsidiaries............................. (763) 617 283
Income tax expense.................................. 20 -- --
------ ------ ------
Income (loss) before equity in undistributed net
income of subsidiaries............................. (783) 617 283
Equity in undistributed net income of subsidiaries.. 4,286 2,417 2,281
------ ------ ------
Net income.......................................... $3,503 $3,034 $2,564
====== ====== ======
</TABLE>
73
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows--operating activities:
Net income........................................ $ 3,503 $ 3,034 $ 2,564
Reconciliation of net income to net cash from
operations:
Equity in undistributed net income of
subsidiaries................................... (4,286) (2,417) (2,281)
Net change in other assets...................... (140) 28 (205)
Net change in other liabilities................. 270 25 91
------- ------- -------
Operating cash flows, net........................... (653) 670 169
------- ------- -------
Cash flows--investing activities:
Principal repayment of loans receivable........... -- 150 --
Purchase of subordinated debentures from CNB...... -- (3,000) --
Capital contribution to the subsidiaries.......... (1,003) (402) (415)
------- ------- -------
Investing cash flows, net........................... (1,003) (3,252) (415)
------- ------- -------
Cash flows--financing activities:
Proceeds from issuance of subordinated debt....... -- 3,000 --
Proceeds from exercise of stock options and
employee stock purchases......................... 1,779 1,127 1,028
Cash paid in lieu of fractional shares on stock
dividends........................................ -- (3) (4)
Payment of cash dividends........................... (1,404) (942) (491)
------- ------- -------
Financing cash flows, net........................... 375 3,182 533
------- ------- -------
Net increase in cash and cash equivalents........... (1,281) 600 287
Cash and cash equivalents at the beginning of the
year............................................... 1,848 1,248 961
------- ------- -------
Cash and cash equivalents at the end of the year.... $ 567 $ 1,848 $ 1,248
======= ======= =======
</TABLE>
74
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. The estimated fair value of financial
instruments of the Company as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................. $ 53,896 $ 53,896 $ 58,111 $ 58,111
Investment securities..................... 105,520 105,849 116,869 117,280
Loans, net................................ 441,560 445,718 284,579 286,090
Financial liabilities:
Deposits:
Demand, noninterest-bearing............. $139,940 $139,940 $ 96,063 $ 96,063
NOW..................................... 26,936 26,936 22,084 22,084
Money market demand accounts............ 271,749 271,749 211,654 211,654
Savings................................. 13,599 13,599 12,486 12,486
Other time certificates................. 38,889 39,104 25,716 25,789
Time certificates, $100 and over........ 68,170 68,227 63,786 64,032
-------- -------- -------- --------
Total deposits.......................... $559,283 $559,555 $431,789 $432,108
-------- -------- -------- --------
Subordinated debt......................... $ 3,000 $ 3,000 $ 3,000 $ 3,000
Short term borrowings..................... $ 12,000 $ 12,000 -- --
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS
The carrying value reported in the balance sheet for cash and cash
equivalents approximates fair value.
INVESTMENT SECURITIES
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term investments, except certain state and
municipal securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily available through
market sources other than dealer quotations, as such fair value estimates are
based on quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value of performing fixed rate loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Company's historical experience
with repayments for each
75
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
loan classifications, modified, as required, by an estimate of the effect of
current economic and lending conditions. The fair value of performing variable
rate loans is judged to approximate book value for those loans whose rates
reprice in less than 90 days. Rate floors and rate ceilings are not considered
for fair value purposes as the number of loans with such limitations is not
significant.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
DEPOSIT LIABILITIES AND BORROWINGS
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTER OF CREDIT
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates
the recorded deferred fee amounts and is excluded from the table.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in many of the
estimates.
NOTE 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
------------- -------------- -------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------- ------ ------- ------ ------- ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $9,964 $8,657 $10,367 $9,312 $11,577 $9,448 $13,129 $9,816
Net interest income..... 6,292 5,452 6,680 5,768 7,393 5,926 8,459 6,195
Provision for loan
losses................. 320 506 365 165 606 145 745 140
Non-interest income..... 811 587 904 554 872 602 943 563
Non-interest expense.... 4,691 4,349 5,072 6,151 5,328 4,544 8,797 4,642
Income before taxes..... 2,092 1,184 2,147 6 2,331 1,839 (140) 1,976
Net income.............. 1,250 730 1,308 23 1,363 1,098 (418) 1,183
Net income per share.... $ 0.35 $ 0.22 $ 0.36 $ 0.01 $ 0.37 $ 0.32 $ (0.13) $ 0.37
</TABLE>
76
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 19TH DAY OF
MARCH, 1997.
Greater Bay Bancorp
By /s/ DAVID L. KALKBRENNER
_____________________________________
David L. Kalkbrenner
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID L. KALKBRENNER President, Chief Executive March 19, 1997
____________________________________ Officer and Director
David L. Kalkbrenner (Principal Executive
Officer)
/s/ STEVEN C. SMITH Executive Vice President, March 19, 1997
____________________________________ Chief Operating Officer and
Steven C. Smith Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JOHN M. GATTO Director March 19, 1997
____________________________________
John M. Gatto
/s/ JAMES E. JACKSON Director March 19, 1997
____________________________________
James E. Jackson
/s/ REX D. LINDSAY Director March 19, 1997
____________________________________
Rex D. Lindsay
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DUNCAN L. MATTESON Director March 19, 1997
____________________________________
Duncan L. Matteson
/s/ GLEN McLAUGHLIN Director March 19, 1997
____________________________________
Glen McLaughlin
/s/ DICK J. RANDALL Director March 19, 1997
____________________________________
Dick J. Randall
/s/ DONALD H. SEILER Director March 19, 1997
____________________________________
Donald H. Seiler
/s/ WARREN R. THOITS Director March 19, 1997
____________________________________
Warren R. Thoits
/s/ EDWIN E. VAN BRONKHORST Director March 19, 1997
____________________________________
Edwin E. van Bronkhorst
</TABLE>
78
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
3.1 Articles of Incorporation of Greater Bay Bancorp; incorporated herein by
reference from Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 33-22783) filed with the Commission on March 5,
1997. N/A
3.2 Bylaws of Greater Bay Bancorp, as amended; incorporated herein by
reference from Exhibit 3.2 to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 14, 1997. N/A
4.1 Form of Subordinated Indenture dated , 1997 to be entered into
between Greater Bay Bancorp and Wilmington Trust Company, as Indenture
Trustee; incorporated herein by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-22783)
filed with the Commission on March 5, 1997. N/A
4.2 Form of Officers' Certificate and Company Order, dated March , 1997;
incorporated herein by reference from Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997. N/A
4.3 (Reserved.) N/A
4.4 Certificate of Trust of GBB Capital I; incorporated herein by reference
from Exhibit 4.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-22783) filed with the Commission on March 5, 1997. N/A
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997;
incorporated herein by reference from Exhibit 4.5 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997. N/A
4.6 Form of Amended and Restated Trust Agreement of GBB Capital I, dated
, 1997; incorporated herein by reference from Exhibit 4.6 to the
Company's Registration Statement on Form S-1 (Registration No. 33-22783)
filed with the Commission on March 5, 1997. N/A
4.7 Form of Trust Preferred Certificate of GBB Capital I (included as an
exhibit to Exhibit 4.6). N/A
4.8 Form of Common Securities Certificate of GBB Capital I (included as an
exhibit to Exhibit 4.6). N/A
4.9 Form of Trust Preferred Securities Guarantee Agreement; Incorporated
herein by reference from Exhibit 4.9 to the Company's Registration
Statement on Form S-1 (Registration No. 33-22783) filed with the
Commission on March 5, 1997. N/A
4.10 Form of Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.6). N/A
4.11 Form of Subordinated Debentures; incorporated herein by reference from
Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015),
filed with the Commission on October 25, 1995. N/A
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated as of
November 22, 1996; incorporated herein by reference from Exhibit 4.12 to
the Company's Registration Statement on Form S-1 (Registration No. 33-
22783) filed with the Commission on March 5, 1997. N/A
4.13 Supplemental Debenture Agreement dated November 27, 1996 between Cupertino
National Bancorp and Mid-Peninsula Bancorp; incorporated herein by
reference from Exhibit 4.13 to the Company's Registration Statement on
Form S-1 (Registration No. 33-22783) filed with the Commission on March 5,
1997. N/A
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
10.1 WestCal Agreement of Lease dated April 24, 1989 related to premises
located at 100 South Ellsworth Avenue, San Mateo, California; incorporated
herein by reference from Exhibit 10.6 to Registration Statement on Form S-
4 (Registration
No. 33-79798), filed with the Commission on July 15, 1994. N/A
10.2 WestCal Commercial Lease and Deposit Receipt dated November 26, 1993
related to premises located at 1313 Laurel Street, San Carlos, California;
incorporated herein by reference from Exhibit 10.7 to Registration
Statement on Form S-4 (Registration No. 33-79798), filed with the
Commission on July 15, 1994. N/A
10.3 Mid-Peninsula Bank Lease Agreement dated March 11, 1987 and associated
documents relating to premises located at 420 Cowper Street, Palo Alto,
California; incorporated herein by reference from Exhibit 10.13 to Mid-
Peninsula Bancorp's Annual Report on Form 10-K for the year ended December
31, 1994 (File No. 0-25034), filed with the Commission on March 30, 1995. N/A
10.4 David L. Kalkbrenner Employment Agreement, dated March 3, 1992;
incorporated herein by reference from Exhibit 10.15 to Mid-Peninsula
Bancorp's Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-25034), filed with the Commission on March 30, 1995.** N/A
10.5 Form of Mid-Peninsula Bank Indemnification Agreement for directors and
executive officers; incorporated herein by reference from Exhibit 10.16 to
Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-25034), filed with the Commission on March
30, 1995. N/A
10.6 Addendum to Lease Agreement dated March 11, 1987 for premises located at
420 Cowper Street, Palo Alto, California; incorporated herein by reference
from Exhibit 10.18 to Mid-Peninsula Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the Commission on March
29, 1996. N/A
10.7 Addendum to Lease Agreement dated November 26, 1993 for premises located
at 1313 Laurel Street, San Carlos, California; incorporated herein by
reference from Exhibit 10.19 to Mid-Peninsula Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1995, filed with the Commission
on March 29, 1996. N/A
10.8 Salary Continuation Agreement entered into with David L. Kalkbrenner dated
April 26, 1995; incorporated herein by reference from Exhibit 10.20 to
Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 29, 1996.** N/A
10.9 Salary Continuation Agreement entered into with Murray B. Dey dated April
26, 1995; incorporated herein by reference from Exhibit 10.21 to Mid-
Peninsula Bancorp's Annual Report on Form 10-K for the year ended December
31, 1995, filed with the Commission on March 29, 1996.** N/A
10.10 Salary Continuation Agreement entered into with Carol H. Rowland dated
April 26, 1995; incorporated herein by reference from Exhibit 10.22 of
Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 29, 1996.** N/A
10.11 Non-management Officer Salary Continuation Agreement entered into with
Susan K. Black dated April 26, 1995; incorporated herein by reference from
Exhibit 10.23 to Mid-Peninsula Bancorp's Annual Report on Form 10-K for
the year ended December 31, 1995, filed with the Commission on March 29,
1996.** N/A
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
10.12 Non-management Officer Salary Continuation Agreement entered into with
Kimberly S. Burgess dated April 26, 1995; incorporated herein by reference
from Exhibit 10.24 to Mid-Peninsula Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the Commission on March
29, 1996.** N/A
10.13 Non-management Officer Salary Continuation Agreement entered into with
Jonas H. Stafford dated April 26, 1995; incorporated herein by reference
from Exhibit 10.25 to Mid-Peninsula Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the Commission on March
29, 1996.** N/A
10.14 Non-management Officer Salary Continuation Agreement entered into with
Charles P. Banavac dated March 21, 1996; incorporated herein by reference
from Exhibit 10.26 of Mid-Peninsula Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the Commission on March
29, 1996.** N/A
10.15 Greater Bay Bancorp 1996 Stock Option Plan; incorporated herein by
reference from Exhibit 10.24 to Registration Statement No. 333-10781 on
Form S-4, filed with the Commission on August 23, 1996.** N/A
10.16 Lease--Banking Facility; incorporated herein by reference from Exhibit
10.1 to Cupertino National Bancorp's Amendment No. 1 to Form S-18
Registration Statement (No. 2-94390), filed with the Commission on
December 11, 1984. N/A
10.17 Employment Agreement with C. Donald Allen dated July 1, 1990; incorporated
herein by reference from Exhibit 10.9 to Cupertino National Bancorp's
Annual Report on Form 10-K for the year ended December 31, 1990 (File No.
0-18015), filed with the Commission on March 30, 1991.** N/A
10.18 Salary Continuation Agreement with C. Donald Allen dated August 1, 1993;
incorporated herein by reference from Exhibit 10.10 to Cupertino National
Bancorp's Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 0-18015), filed with the Commission on March 25, 1994.** N/A
10.19 Litigation Settlement; incorporated herein by reference from Exhibit 10.12
to Cupertino National Bancorp's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 0-18015). N/A
10.20 Emerson Lease; incorporated herein by reference from Exhibit 10.13 to
Cupertino National Bancorp's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 (File No. 0-18015). N/A
10.21 Cupertino National Bancorp 401(k) Profit Sharing Plan; incorporated herein
by reference from Exhibit 10.15 to Cupertino National Bancorp's
Registration Statement on Form S-8 (Registration No. 33-62429), filed with
the Commission on September 8, 1995.** N/A
10.22 Amendment to the Cupertino National Bancorp 401(k) Profit Sharing Plan;
incorporated herein by reference from Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997. N/A
10.23 Amendment Number 2 to the Cupertino National Bancorp 401(k) Profit Sharing
Plan; incorporated herein by reference from Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997. N/A
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
10.24 Cupertino National Bancorp Employee Stock Purchase Plan; incorporated
herein by reference from Exhibit 10.16 to Cupertino National Bancorp's
Registration Statement on Form S-8 (Registration No. 33-62429), filed with
the Commission on September 8, 1995.** N/A
10.25 Salary Continuation Agreement with Ken Brenner dated July 31, 1995;
incorporated herein by reference from Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997.** N/A
10.26 Salary Continuation Agreement with David Hood dated July 31, 1995;
incorporated herein by reference from Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997.** N/A
10.27 Salary Continuation Agreement with Hall Palmer dated July 31, 1995;
incorporated herein by reference from Exhibit 10.27 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997.** N/A
10.28 Salary Continuation Agreement with Steven C. Smith dated July 31, 1995;
incorporated herein by reference from Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22783) filed with
the Commission on March 5, 1997.** N/A
10.29 Form of Indemnification Agreement between Greater Bay Bancorp and with
directors and certain executive officers; incorporated herein by reference
from Exhibit 10.29 to the Company's Registration Statement on Form S-1
(Registration No. 33-22783) filed with the Commission on March 5, 1997.** N/A
21.1 Subsidiaries of the registrants; incorporated herein by reference from
Exhibit 21.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-22783) filed with the Commission on March 5, 1997. N/A
23.1 Consent of Coopers & Lybrand, LLP.
27 Financial Data Schedule .
</TABLE>
- -------
** Represents executive compensation plans and arrangements of the Company.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-16967) of Greater Bay Bancorp (formerly Mid-Peninsula Bancorp)
of our report dated February 27, 1997, on our audits of the consolidated
financial statements of Greater Bay Bancorp as of December 31, 1996 and 1995 and
for the years ended December 31, 1996, 1995 and 1994.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
March 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,896
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,104
<INVESTMENTS-CARRYING> 58,416
<INVESTMENTS-MARKET> 58,745
<LOANS> 448,872
<ALLOWANCE> 7,312
<TOTAL-ASSETS> 622,044
<DEPOSITS> 559,883
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,079
<LONG-TERM> 3,000
0
0
<COMMON> 34,884
<OTHER-SE> 9,798
<TOTAL-LIABILITIES-AND-EQUITY> 622,044
<INTEREST-LOAN> 36,278
<INTEREST-INVEST> 7,123
<INTEREST-OTHER> 1,636
<INTEREST-TOTAL> 45,037
<INTEREST-DEPOSIT> 15,732
<INTEREST-EXPENSE> 16,213
<INTEREST-INCOME-NET> 28,824
<LOAN-LOSSES> 2,036
<SECURITIES-GAINS> (263)
<EXPENSE-OTHER> 23,888
<INCOME-PRETAX> 6,430
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,503
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 5.85
<LOANS-NON> 1,875
<LOANS-PAST> 1,239
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,423
<ALLOWANCE-OPEN> 4,399
<CHARGE-OFFS> 299
<RECOVERIES> 376
<ALLOWANCE-CLOSE> 7,312
<ALLOWANCE-DOMESTIC> 7,312
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,218
</TABLE>
